records to piece an order lifecycle together. As noted above in
Section IV.D.2.b(2)C, linking algorithms have varying rates of
success and significant error rates in event linking are common. The
lack of success could be due to the lack of a cross-participant
error resolution process, the complexity in the linkage, or
otherwise missing key information needed for linkage. As a result,
regulators may invest significant time and resources into linking
data only to achieve a success rate significantly less than 100%.
Linking across multiple data sources makes linking even more time
consuming.
---------------------------------------------------------------------------

    In addition, those who use regulatory data also typically take time
to ensure the accuracy of the data. When regulators question the
accuracy of data, they often check several alternative sources until
they are comfortable that their data are accurate. This checking of
data accuracy and augmentation process adds time to an investigation or
analysis. In some cases, regulators may filter out unreliable data or
refocus an investigation to avoid relying on data after spending time
and resources unsuccessfully attempting to ensure accuracy.
    As discussed in the Adopting Release, the timely accessibility of
data to regulators also impacts the efficacy of detecting (and possibly
mitigating the effects of) some types of market manipulation.\475\ For
example, some pernicious trading schemes are designed to generate large
``quick-hit'' profits in which market participants attempt to transfer
the proceeds from the activity to accounts outside of the reach of
domestic law enforcement as soon as the offending transactions have
settled in the brokerage account (typically three days after
execution). The timeframes currently required to acquire data generally
complicate the prevention of these asset transfers.
---------------------------------------------------------------------------

    \475\ See Adopting Release, supra note 9, at 45731.
---------------------------------------------------------------------------

3. Request for Comment on the Baseline
    The Commission requests comment on all aspects of the Baseline for
the economic analysis of the CAT NMS Plan. In particular, the
Commission seeks responses to the following questions:
    240. Do Commenters agree with the Commission's assessment of the
Baseline for the economic effects of the CAT NMS Plan? Why or why not?
    241. Do Commenters believe that the Baseline appropriately
describes current market surveillance, examination, and investigation
activities by regulators? Why or why not?
    242. Do Commenters believe that the Baseline appropriately
describes current market event analysis and reconstruction activities
by regulators? Why or why not?
    243. Do Commenters believe that the Baseline appropriately
describes market analysis activities by regulators? Why or why not?
    244. Do Commenters believe that the Baseline appropriately
describes the sources of trade and order data currently available to
regulators? Why or why not?
    245. Are there additional sources of trade and order data currently
available to regulators? Please explain and describe those sources in
detail, including any limitations.
    246. Do Commenters agree with the Commission's assessment of the
completeness of the trade and order data currently available to
regulators? Why or why not? Does the fragmented nature of current data
sources pose significant challenges to regulators seeking complete
data?
    247. Do Commenters agree with the Commission's assessment of the
accuracy of the trade and order data currently available to regulators?
Why or why not?
    248. Do Commenters agree that the error rates in current data
sources or in responses to ad hoc data requests pose significant
challenges to regulators? Why or why not? Do Commenters have additional
statistics on error rates in these data?
    249. Do Commenters agree with the Commission's assessment of the
Baseline of clock synchronization for broker-dealers, exchanges, and
others in the securities industry? Please explain. Does the
Commission's analysis appropriately describe the frequency of orders
that regulators may need to sequence and the challenges to sequencing
given current clock synchronization standards? If not, do Commenters
have more appropriate analyses? How could the Commission improve the
analysis? Please explain.
    250. Do Commenters believe that the Baseline appropriately
describes granularity of time stamps in the trade and order data
currently available to regulators? Please explain.
    251. Do Commenters agree with the Commission's assessment of
regulators' ability to combine or link data across the sources of trade
and order data currently available to regulators? Please explain.
    252. Do Commenters believe that the Baseline appropriately
describes customer and broker-dealer identifiers in the sources of
trade and order data currently available to regulators? Please explain.
    253. Do Commenters believe that the Baseline appropriately
describes aggregation within the sources of trade and order data
currently available to regulators? Please explain.
    254. Do Commenters agree with the Commission's assessment of the
current ability of regulators to access trade and order data? Why or
why not?
    255. Do Commenters agree with the Commission's assessment of the
timeliness of the trade and order data currently available to
regulators? Why or why not?
    256. Is there any other information that the Commission should
include in the Baseline? Please explain.

E. Benefits

    As noted in the Framework Section above, the economic benefits of
the CAT NMS Plan would come from any expanded or more efficient
regulatory activities facilitated by improvements to the data
regulators use because the Plan would create a new consolidated data
source, CAT Data that could replace the use of some current data
sources for many regulatory activities. Therefore, the Benefits Section
first describes how CAT Data compares to data regulators currently use
for regulatory activities. Then this Section describes how the CAT Data
would improve regulatory

activities and how these improvements benefit investors.
    The Commission preliminarily believes that the CAT NMS Plan would
produce data that would improve on current data sources, because CAT
Data would result in regulators having direct access to consolidated
audit trail data that would improve many of the regulatory activities
discussed in the Baseline Section. As summarized in Table 4, if the
Plan is approved, the Commission preliminarily believes that the Plan
would generate improvements in the quality of data that regulators
would have access to in the areas of completeness, accuracy,
accessibility, and timeliness. The Commission preliminarily believes
that the improvements in the quality of regulatory data within these
categories would significantly improve the ability of regulators to
perform a wide range of regulatory activities, which would lead to
benefits for investors and markets. In addition, the Commission
preliminarily believes that certain provisions in the Plan related to
future upgrades of the Central Repository, the promotion of the
accuracy of CAT Data, the promotion of the timeliness of CAT Data, and
the inclusion of specific governance provisions identified by the
Commission in the Adopting Release for Rule 613, increase the
likelihood that the potential benefits of the CAT NMS Plan described
below would be realized.
    In the category of completeness, the ability for regulators to
access more material data elements from a consolidated source would
enable regulators to more efficiently carry out investigations,
examinations, and analyses because regulators could acquire from a
single source data that they would otherwise need to compile from many
data sources. This data source would include data elements that
regulators currently acquire with difficulty (if at all), including
customer information, allocation records, open/close position
information for equities, and certain other trade and order information
not consistently available in SRO audit trails.\476\
---------------------------------------------------------------------------

    \476\ See CAT NMS Plan supra note 3, at Sections 1.1, 6.3 and
6.4; see also 17 CFR 242.613(c)(7).
---------------------------------------------------------------------------

    In the category of accuracy, the Commission preliminarily believes
that the Plan would substantially improve data accuracy by requiring
CAT Data to be collected, compiled, and stored in a uniform linked
format using consistent identifiers for customers and market
participants. These requirements should over time result in fewer
inaccuracies in the data as well as fewer inaccuracies introduced in
combining data compared to the current data regime.\477\ The CAT NMS
Plan would also require that CAT Reporters' business clocks be
synchronized to within 50 milliseconds of the time maintained by the
NIST, which would increase the precision of the time stamps provided by
the 39% of broker-dealers who currently synchronize their clocks with
less precision than what is called for by the Plan. This information
may also be used to partially sequence surrounding events. However,
while the Commission preliminarily believes that the requirements in
the Plan for clock synchronization and time stamp granularity would
improve the accuracy of data with respect to the sequencing of market
events, the improvements would be modest, as regulators' would
experience improvement for a small percentage of market events relative
to all surrounding events.\478\ Independent of the potential time clock
synchronization benefits, the order linking data that would be captured
in CAT should increase the proportion of events that could be sequenced
accurately. This reflects the fact that some records pertaining to the
same order could be sequenced by their placement in an order lifecycle
(e.g., an order submission must have occurred before its execution)
without relying on time stamps.
---------------------------------------------------------------------------

    \477\ The Commission recognizes that the high initial Error Rate
tolerance of the CAT NMS Plan could reduce the accuracy of raw CAT
Data relative to current data sources. However, as stated in the
Plan ``the Participants expect that error rates after reprocessing
of error corrections will be de minimis.'' See CAT NMS Plan supra
note 3, at Appendix C, Section 3(b), n.102.
    \478\ See FIF Clock Offset Survey, supra note 127.
---------------------------------------------------------------------------

    In the category of accessibility, the Commission preliminarily
believes that the Plan would substantially improve the access of data
for regulators due to the Plan's requirement for regulators to have
direct access to CAT Data. While some elements of CAT Data can
currently be obtained from other sources, it can take regulators weeks
or months to obtain this data. As opposed to the current state of
fragmented data with indirect regulatory access, if the CAT NMS Plan is
approved, regulators would have direct access to consolidated trade and
order data from a single source. Therefore, instead of requesting data
from multiple sources, the Plan would allow regulators to log into a
single system and query data directly from the system. This direct
access for regulators would dramatically reduce the hundreds of
thousands of requests that regulators must make each year in order to
obtain data, thus reducing the burden on the industry.
    In the category of timeliness, the Commission preliminarily
believes that the Plan would significantly improve the timeliness of
data acquisition and use, which could improve the timeliness of
regulatory actions that use data. CAT Data would be reported by 8:00
a.m. Eastern Time on day T+1 and made available to regulators in raw
form after it is received and passes basic formatting validations,\479\
with an error correction and linkage process that would be completed by
8:00 a.m. Eastern Time on day T+5.\480\ These requirements would ensure
that data is available to regulators faster than in the current system
and should also reduce the amount of time regulators would need to
process data prior to usage.
---------------------------------------------------------------------------

    \479\ While the Plan does not specify exactly when these
validations would be complete, the requirement to link records by
12:00 p.m. Eastern Time on day T+1 gives a practical upper bound on
this timeline.
    \480\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.2(a).
---------------------------------------------------------------------------

    Regulatory activities expected to benefit from improved data
quality would include surveillance, investigations, examinations,
analysis and reconstruction of market events, and analysis in support
of rulemaking initiatives. Data is essential to all of these regulatory
activities and therefore substantial improvements in the quality of the
regulatory data should result in substantial improvements in the
efficiency and effectiveness of these regulatory activities, which
should translate into benefits to investors and markets. For example,
improved data could lead to more effective and efficient surveillance
that better protects investors and markets from violative behavior and
facilitates more efficient and effective risk-based investigations and
examinations that more effectively protect investors. Together, these
improved activities could better deter violative behavior of market
participants, which could improve market efficiency. Furthermore, this
increase in directly accessible data should improve regulators'
understanding of the markets, leading to more informed public policy
decisions that better address market deficiencies to the benefit of
investors and markets.
    The Commission notes that the Plan lacks information regarding the
details of certain elements of the Plan, primarily because many details
likely to affect the benefits of the Plan have not yet been determined,
which creates some uncertainty about the expected economic effects. As
discussed further below, lack of specificity surrounding the processes
for converting data formats and linking related order events

creates uncertainty in the anticipated improvements in accuracy because
such processes have the potential to create new data inaccuracies. Lack
of specificity surrounding the process for regulators to access the CAT
Data also creates uncertainty around the expected improvements in
accessibility. For example, while the Plan indicates that regulators
would have an on-line targeted query tool and a tool for user-defined
direct queries or bulk extraction,\481\ the Plan itself does not
provide an indication for how user-friendly the tools would be or the
particular skill set needed to use the tools for user-defined direct
queries.

[GRAPHIC] [TIFF OMITTED] TN17MY16.328

    \481\ See CAT NMS Plan, supra note 3, at Appendix D, Sections
8.1, 8.2.

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

1. Improvements in Data Qualities
    As explained above, in the Adopting Release the Commission
identified four qualities of trade and order data that impact the
effectiveness of core SRO and Commission regulatory efforts: Accuracy,
completeness, accessibility, and timeliness.\486\ In assessing the
potential benefits of the CAT NMS Plan, the Commission's economic
analysis compares the data that would be available under the Plan to
the trading and order data currently available to regulators.\487\ As
explained in detail below, the Commission preliminarily believes that
the Plan would improve data in terms of all four qualities noted above,
although uncertainty remains as to the expected degree of improvement
in some areas.
---------------------------------------------------------------------------

    \486\ See Adopting Release, supra note 9, at 45727.
    \487\ Changes in all four data qualities affect certain data-
driven regulatory activities. The benefits of the Plan derive from
the changes to these regulatory activities.
---------------------------------------------------------------------------

a. Completeness
    The CAT NMS Plan, if approved, would result in regulators having
direct access to a single data source that would be more complete than
any current data source.\488\ The CAT Data would be more complete than
other data sources because it would contain data from a greater number
of broker-dealers on more event types, products, and data fields, when
compared to existing SRO audit trails and other data sources. As
discussed in more detail below, while some current data sources contain
many of the elements that would be included in CAT Data, the CAT Data
would consolidate that data into one source to produce a data source
much more complete than any existing source. CAT Data would also
include some elements that are not available from any current data
source. Having this data consolidated in a single source would provide
numerous benefits that are described below.
---------------------------------------------------------------------------

    \488\ See Sections IV.C.1.a(1) and IV.D.2.b(1), supra for a
definition of completeness.
---------------------------------------------------------------------------

(1) Events and Products
    CAT Data would be more complete than any current data source
because it combines currently fragmented information into one data
source. In particular, the Plan states that the Central Repository,
under the Plan Processor's oversight, shall receive, consolidate, and
retain all CAT Data.\489\ ``CAT Data'' is defined as ``data derived
from Participant Data, Industry Member Data, SIP Data, and such other
data as the Operating Committee may designate as CAT Data from time to
time.'' \490\ Section 6.3 of the Plan describes the data to be received
from Participants that are national securities exchanges, which would
include data for ``each NMS Security \491\ registered or listed for
trading on such exchange or admitted to unlisted trading privileges on
such exchange.'' Participants that are a national securities
association (i.e., FINRA) must report data for each ``Eligible Security
for which transaction reports are required to be submitted to that
association.'' \492\ ``Eligible Security'' is defined in the Plan as
all NMS Securities and all OTC Equity Securities,\493\ and ``OTC Equity
Security'' is defined as ``any equity security, other than an NMS
Security, subject to prompt last sale reporting rules of a registered
national securities association and reported to one of such
association's equity trade reporting facilities.'' \494\ ``Industry
Member Data'' refers to audit trail data reported by members of the
exchanges and national associations, which includes Options Market
Makers.\495\ SIP Data is defined in the Plan as information, including
size and quote condition, on quotes including the National Best Bid and
National Best Offer (``NBBO'') for each NMS Security; Last Sale Reports
and transaction reports reported pursuant to an effective transaction
reporting plan filed with the Commission pursuant to, and meeting the
requirements of Rule 601 and 608; trading halts, limit-up limit-down
(``LULD'') price bands,\496\ and LULD indicators; and summary data or
reports described in the specifications for each of the SIPs and
disseminated by the respective SIP.\497\
---------------------------------------------------------------------------

    \489\ See CAT NMS Plan, supra note 3, at Section 6.5(a)(i).
    \490\ See id. at Section 1.1.
    \491\ An ``NMS Security'' is defined as ``any security or class
of securities for which transaction reports are collected,
processed, and made available pursuant to an effective transaction
reporting plan, or an effective national market system plan for
reporting transactions in listed options.'' See 17 CFR
242.600(b)(46).
    \492\ See CAT NMS Plan, supra note 3, at Section 6.3(c)(ii).
    \493\ See id. at Section 1.1. Audit trail data regarding OTC
Equity Securities was not required under Rule 613, but the
Participants, in consultation with the DAG, included OTC Equity
Securities in the CAT NMS Plan so as to permit the retirement of
OATS and thereby reduce costs to the industry. See CAT NMS Plan,
supra note 3, at Appendix C, Section C.9, Section A.1(a) n.16. The
determination to include OTC Equity Securities would also have a
positive effect on further reducing fragmentation of data sooner.
    \494\ See CAT NMS Plan, supra note 3, at Section 1.1.
    \495\ See id. at Section 6.4(d).
    \496\ See Plan to Address Extraordinary Volatility for
information on LULD, available at http://www.finra.org/sites/default/files/regulation-NMS-plan-to-address-extraordinary-market-volatility.pdf; see also Securities Industry Automation Corporation,
Consolidated Tape System, CTS, Output Multicast Interface
Specifications, available at https://www.nyse.com/publicdocs/ctaplan/notifications/trader-update/cts_output_spec.pdf Securities
Industry Automation Corporation, Consolidated Tape System, CQS,
Output Multicast Interface Specifications, available at https://www.nyse.com/publicdocs/ctaplan/notifications/trader-update/cqs_output_spec.pdf. The UTP Plan Trade Data Feed \SM\ (UTDF\SM\),
Direct Subcriber Interface Specification, Version 14.4 available at
http://www.utpplan.com/DOC/utdfspecification.pdf.
    \497\ See id. at Section 1.1 and Section 6.5(a)(ii).
---------------------------------------------------------------------------

    CAT Data would include data from all SRO audit trails, combined
into a single data source. In addition, it would include some off-
exchange activity not captured on current SRO audit trails. Section
6.4(d) of the Plan requires the Participants to require their Industry
Members to record and report order events to the Central Repository.
The Commission notes that SRO audit trails currently do not include the
activity of firms that are not members of that SRO.\498\ And, currently
only FINRA requires its members to report their off-exchange activity.
While broker-dealers that trade off-exchange must be members of FINRA
unless their activity fits the terms of the exemption in Rule 15b9-
1,\499\ firms that qualify for the exemption in that rule and that are
not FINRA members do not report their off-exchange activity to
OATS.\500\ This exemption amounts to a large percentage of off-exchange
activity. Broker-dealers that are not FINRA Members accounted for 48%
of orders sent directly to ATSs in 2014, 40% of orders sent directly to
ATSs in 2013, and 32% in 2012.\501\ Because all SROs

are Participants in the Plan, under the Plan all broker-dealers with
Reportable Events, including off-exchange, would be required to report
the required CAT Data to the Central Repository. And, the inclusion of
these additional Reportable Events would make CAT Data more complete
than the combination of current SRO audit trails.
---------------------------------------------------------------------------

    \498\ This information can sometimes be inferred through data
reported by member firms. See Securities Exchange Act Release No.
74581 (March 25, 2015), 80 FR 18036 (April 2, 2015) (``Proposed
Amendments to Rule 15b9-1''), Section V.B.2; see also CAT NMS Plan,
supra note 3, at Appendix C Section B.7(a)(ii)(A).
    \499\ See id. for details on the exemption to Rule 15b9-1 and
the proposed modifications to the Exemption for Certain Exchange
Members that would require a dealer to be a member of a registered
national securities association to conduct most off-exchange
activity. If these modifications are adopted, Section IV.F.1.c(2)B.i
discusses counts of broker-dealers currently not represented in
OATS; the 15b9-1 exclusion applies to approximately 125 firms, most
of which are not expected to incur OATS reporting obligations if
15b9-1 modifications are approved.
    \500\ Furthermore, not all FINRA members are obligated to report
to OATS. FINRA's rules exempt from reporting certain members that
engage in a non-discretionary order routing process; additionally,
FINRA has the authority to exempt other members who meet specific
criteria from the OATS recording and reporting requirements, and has
granted many such exemptions. See supra notes 396 and 397, and
accompanying text. Approximately 799 firms that are excluded or
exempt from OATS would incur CAT reporting obligations if the Plan
were approved; see also Section IV.F.1.c(2)B.i, infra.
    \501\ See Proposed Amendments to Rule 15b9-1, supra note 498, at
n.21. If the Commission adopts the proposed amendments to Rule 15b9-
1 set out in the proposed modifications to the Exemption for Certain
Exchange Members, the percentage of off-exchange activity captured
by CAT Data that is not currently captured by another audit trail
would be smaller, and fewer broker-dealers would be excluded from
OATS, reducing the number of broker-dealers that would be added to
regulatory data if the Plan were approved. Section IV.F.1.c(2)B.ii
discusses counts of broker-dealers currently not represented in
OATS; the 15b9-1 exclusion applies to approximately 125 firms, most
of which are not expected to incur OATS reporting obligations if
15b9-1 modifications are approved. Specifically, the exemption from
FINRA membership would be limited to dealers that effect
transactions off the exchanges of which they are members solely for
the purpose of hedging the risks of their floor-based activity, and
brokers and dealers that effect transactions off the exchange
resulting from orders that are routed by a national securities
exchange of which they are members. Id. at Section II.
---------------------------------------------------------------------------

    CAT Data would also include many Reportable Events such as order
origination, order routing, receipt of a routed order, order
modifications, cancellations, and executions, and trade cancellations.
Currently, OATS data contains most of these Reportable Events but does
not cover all participants and does not include options.\502\ For
example, CAT Data would contain more events than EBS data, trade
blotters, and public data. As previously noted, OATS data also do not
include proprietary orders originated by a trading desk in the ordinary
course of a member's market making activities (or ``principal
activity'').\503\ But, pursuant to Rule 613(j)(8),\504\ principal
trading would be included in CAT reporting requirements, an improvement
over OATS. This requirement significantly improves completeness because
such events are not included in current SRO audit trails, and account
for a significant portion of market activity (40.5% of all transactions
and 67% of all exchange message traffic according to a Commission
analysis).\505\ This would improve regulatory activities in which
observation of pricing information, as it relates to market activity,
is important for determining the legality and consequences of market
activity of interest as well as regulatory analysis of market behavior
in general.
---------------------------------------------------------------------------

    \502\ See Section IV.D.2.b(1)A, supra.
    \503\ Id.
    \504\ See 17 CFR 242.613(j)(8).
    \505\ See Section IV.D.2.b(1)A, supra for a description of this
analysis.
---------------------------------------------------------------------------

    CAT Data also would include the information described above for
listed equities and options and OTC Equity Securities.\506\ Therefore,
the inclusion in CAT Data of all these products adds an additional
level of completeness relative to current data sources.
---------------------------------------------------------------------------

    \506\ See supra note 494.
---------------------------------------------------------------------------

(2) Data Fields
    The CAT NMS Plan also would improve completeness by consolidating
in a single source fields that currently may only be available from
some data sources, and by including some fields that are difficult for
regulators to compile. Not every data field that would be in CAT Data
is currently included in SRO audit trails, and very few fields are
included in all data sources.
    The inclusion of consistent unique customer information, in
particular, in the CAT Data represents a significant improvement over
current SRO audit trails in terms of completeness. Rule 613(c)(7)(i)
requires that a CAT Reporter report information to the Central
Repository that uniquely identifies a customer across all broker-
dealers.\507\ As noted in the Baseline, very few current data sources
contain customer information, and those that do are largely limited in
the completeness and accuracy of this information, all of which
significantly limits regulatory efficiency.\508\ The identification of
customers underlies numerous enforcement activities and many
examination and surveillance activities of regulators. This would also
allow regulators to obtain information efficiently regarding customers,
such as issuers repurchasing their stock and short sellers.\509\
---------------------------------------------------------------------------

    \507\ 17 CFR 242.613(c)(7)(i). Specifically, Sections 9.1 and
9.2 of Appendix D of the Plan require the CAT Data to include the
following Customer information, at minimum: social security number
or individual taxpayer identification number, date of birth, current
name, current address, previous name and previous address. For legal
entities, the Plan requires the reporting of the LEI (if available),
tax identifier, full legal name and address. The Plan also requires
that the following information about a Customer be reported to the
Central Repository, at a minimum: Account owner name, account owner
mailing address, account tax identifier, market identifiers, type of
account, firm identifier number, prime broker ID, bank repository
ID, and clearing broker. See CAT NMS Plan supra note 3, at Sections
9.1 and 9.2. The CAT Data must also support account structures that
have multiple account holders. See id. Relatedly, the unique
Customer-ID also improves accuracy because Rule 613 requires that it
be consistent and associated with all Reportable Events involving
that Customer. Current data sources do not provide consistent
customer identifiers. See Sections IV.D.2.b(2)D supra, and
IV.E.1.b(4), infra.
    \508\ See Sections IV.D.2.a(1) and IV.D.2.b(1)B, supra. As
discussed above, the Commission notes that SRO audit trails
typically do not provide customer information but a recent FINRA
rule change would require its members to report to OATS non-FINRA
member customers who are broker-dealers. See supra note 407.
    \509\ See Short Sale Reporting Study, supra note 413, for a
discussion of the benefits of being able to identify short sellers.
Because CAT Data would include a short sale mark and identify
customers, regulators could use CAT Data to identify short sellers.
---------------------------------------------------------------------------

    In addition to data fields providing customer information, the Plan
would improve completeness by including other data fields not found on
current SRO audit trails. For example, CAT Data would include
allocation information, open/close information, Quote Sent Time, and
information on whether a Customer gave a modification or cancellation
instruction.
    The information in the Allocation Report required by the CAT NMS
Plan represents a significant improvement in completeness over current
sources for subaccount allocation data, such as trade blotter and EBS
data. Under the Plan, an Allocation Report would include the Firm
Designated ID for any account(s), including subaccount(s), to which
executed shares are allocated, the security that has been allocated,
the identifier of the firm reporting the allocation, the price per
share of shares allocated, the side of shares allocated, the number of
shares allocated to each account, and the time of the allocation.\510\
While most of the fields required on the Allocation Report are included
on trade blotter or EBS data, their inclusion in CAT Data would
significantly reduce the time and effort expended for regulators to
acquire such information.\511\ Because it is not required on EBS or in
broker-dealer recordkeeping rules, the allocation time field on the
Allocation Report provides information that is currently even more
difficult for regulators to acquire than the other information on the
Allocation Report. These data improvements should facilitate the use of
allocation data in regulatory investigations and should result in more
effective and efficient investigative processes. Allocation data also
serves an important role in many other regulatory activities that aim
to protect investors.\512\ Indeed, allocation time is an extremely
important data field because it is critical in investigations of
violations like market manipulation and cherry-picking.\513\
---------------------------------------------------------------------------

    \510\ See CAT NMS Plan, supra note 3, at Section 1.1; see also
Exemption Order, supra note 18, at 11867.
    \511\ See Section IV.D.2.b(1)B, supra, for further information
on Allocation Reports.
    \512\ Id.
    \513\ Id.
---------------------------------------------------------------------------

    In addition, while many of the elements contained in the definition
of ``Material Terms of the Order'' are

collected in current SRO audit trails, the CAT NMS Plan's definition of
Material Terms of the Order expands the CAT Data beyond the coverage of
current SRO audit trails and other sources. The CAT NMS Plan requires
that the Material Terms of the Order be reported for order origination,
routing, and the receipt of a routed order. And Material Terms of the
Order is defined to include the security symbol, security type, price
(if applicable), size (displayed and non-displayed), side (buy/sell),
order type, if a sell order, whether the order is long, short, or short
exempt, open/close indicator, time in force (if applicable), and any
special handling instructions.\514\ In addition, if the order is for a
Listed Option, the Material Terms of the Order would be defined to
include option type (put/call), option symbol or root symbol,
underlying symbol, strike price, expiration date, and open/close.\515\
---------------------------------------------------------------------------

    \514\ See CAT NMS Plan, supra note 3, Section 1.1; see also 17
CFR 242.613(j)(7).
    \515\ Id.
---------------------------------------------------------------------------

    Because data on open/close indicators are not currently included in
SRO audit trails, obtaining data on whether a trade opens or closes a
position in equities is currently very difficult. Ready access to this
information would facilitate regulators' ability to determine whether a
purchase or sale increases or decreases equity exposure, such as when a
buy covers a short position.\516\ This would help regulators
reconstruct customer positions without requiring specific position data
and would assist in analysis of rules such as Rule 105 of Regulation
M,\517\ governing when short sellers can participate in a follow-on
offering.\518\ This information is also useful in investigating short
selling abuses and short squeezes.\519\ Among other things, a build-up
of a large short position by one investor along with the spreading of
rumors may be indicative of using short selling as a tool to
potentially manipulate prices. Information on when the position
decreases is also useful for indicating potential manipulation, insider
trading, or other rule violations.\520\ The ability to determine
whether an order adds to a position, along with the timing of the
order, is particularly important in detecting and investigating
portfolio pumping or marking the close.\521\
---------------------------------------------------------------------------

    \516\ The open/close indicator would help to identify buy to
cover orders because a buy order that closes a position would
presumably be a buy-to-cover order. See Proposing Release supra note
9, at 32575. The Commission notes that the accuracy of this data
field may depend on how the Plan Processor interprets when CAT
Reporters should populate the field with particular permitted
values. See infra note 537 and accompanying text.
    \517\ 17 CFR 242.105.
    \518\ For a discussion of additional benefits of position
information and buy to cover information, see Short Sale Reporting
Study, supra note 413; see also Press Release: SEC Charges Six Firms
for Short Selling Violations in Advance of Stock Offerings (October
14, 2015), available at http://www.sec.gov/news/pressrelease/2015-239.html.
    \519\ See Proposing Release, supra note 9 at 32575.
    \520\ Id.
    \521\ Id.
---------------------------------------------------------------------------

    The CAT Data would also include information regarding the sent time
for Options Market Maker quotes and information about whether a
modification or cancellation instruction for an order was given by a
Customer associated with an order, or was initiated by a broker-dealer
or exchange associated with the order. Neither of these data fields is
currently readily available from existing SRO audit trails.\522\ Quote
sent time is particularly informative for certain narrow market
reconstructions for enforcement investigations, and knowing whether the
member or Customer made a modification or cancellation helps regulators
understand the decisions that broker-dealers and others make in the
interest of best execution.
---------------------------------------------------------------------------

    \522\ See Exemption Order, supra note 18 at 11857 and 11861.
---------------------------------------------------------------------------

    The remaining data fields included in CAT Data are also included in
some or all current SRO audit trails, although no single source
contains all of them. For instance, Rule 613(c)(7)(vi)(C) requires the
collection of audit trail data that links executions to contra-side
orders and a CAT-Order-ID for the contra-side order.\523\ An order
identifier for the contra-side order(s) would help regulators better
reconstruct executions. Although some current exchange audit trails
identify counterparties to trades, this identification is sometimes
more difficult for off-exchange equity trading.\524\ Further, while all
SRO audit trails contain time stamps, as CAT Data would, some sources
of regulatory data do not currently include all the types of time
stamps that would be in CAT Data.
---------------------------------------------------------------------------

    \523\ 17 CFR 613.242(c)(7)(vi)(C).
    \524\ For off-exchange trading, OATS records sometimes do not
directly identify counterparties. In the case of ATS trades,
sometimes counterparty broker-dealers can only be identified through
TRF records; sometimes ATS OATS records alone suffice. For
internalized trades, the reporting broker-dealer is the
counterparty. By combining OATS with TRF data, regulators can
identify the broker-dealers representing the counterparties for over
99% of TRF reported trades, but identifying customer account
information generally requires a data request to those broker-
dealers. See Section IV.D.2.b(2)A, supra.
---------------------------------------------------------------------------

    Additionally, the inclusion of order display information (i.e.,
whether the size of the order is displayed or non-displayed), and
special handling instructions in CAT Data improve completeness because
they are not always mandatory in SRO audit trail data, and therefore
may not be consistently available without data requests to broker-
dealers.\525\ Order display information is useful for examining how
hidden liquidity affects markets or how regulatory changes affect
hidden liquidity, and special order handling instructions could assist
in examinations of best execution and could allow regulators to better
understand the role and trends of these instructions in the market.
---------------------------------------------------------------------------

    \525\ See supra note 412.
---------------------------------------------------------------------------

    Other information required by the CAT NMS Plan includes the
security symbol, date and time of the Reportable Event, the identity of
each Industry Member or Participant accepting, routing, receiving,
modifying, canceling, or executing each order, the identity and nature
of the department or desk to which an order is routed, if an order is
routed internally within the system of an Industry Member, a CAT-Order-
ID, changes in any Material Term of the Order (if the order is
modified), execution capacity, the CAT-Order-ID of any contra-side
order(s), and the SRO-Assigned Market Participant Identifier of the
clearing broker or prime broker.\526\ Of these fields, the security
symbol and date are the only data found on all current data sources.
---------------------------------------------------------------------------

    \526\ See CAT NMS Plan, supra note 3, Sections 6.3(d); 6.4(d).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the CAT Data would
include all data elements that would be useful and efficient to include
in a consolidated audit trail. The Commission previously considered
which fields should be reported to CAT when proposing and adopting Rule
613. The set of data fields required by Rule 613 reflected the
Commission's assessment, as informed by public comment, of the benefits
and costs of including various data elements in CAT.\527\ While the
costs and benefits of including particular fields can change due to
technological advances and/or changes in the nature of markets, the
Plan contains provisions regarding periodic reviews and upgrades to CAT
that could lead to proposing additional data fields that are deemed
important.\528\ In addition the Commission reviewed gap analyses that
examine whether the CAT Data would contain all important data elements
in current data sources.\529\ As a result of

this review, the Commission is aware that one data gap involves OATS
data fields that allow off-exchange transactions to be matched to their
corresponding trade reports at trade reporting facilities, and
recognizes that these fields are important to assure trade reporting
requirements are being met for off-exchange trading.\530\ Similarly,
the Commission notes that EBS includes 13 data elements that are not
required by CAT or derivable through other CAT fields and would thus
reflect some limitations of the Plan if EBS were retired before those
missing data elements were incorporated into CAT.\531\ However, as
discussed in Section 3 of Appendix D of the Plan, prior to the
retirement of existing systems, the CAT Data must contain data elements
sufficient to ensure the same regulatory coverage provided by existing
systems that are anticipated to be retired.\532\ The Commission
therefore expects that any missing elements that are material to
regulators would be incorporated into CAT Data prior to the retirement
of the systems that currently provide those data elements to
regulators. And the Commission preliminarily believes that CAT Data
would include the audit trail data elements that currently exist in
audit trail data sources and that could be retired upon implementation
of the CAT.
---------------------------------------------------------------------------

    \527\ See Adopting Release, supra note 9, at 45751.
    \528\ See Section IV.E.3a, infra for a discussion of adding new
data fields and other requirements for upgrading the CAT Data after
approval.
    \529\ The Commission acknowledges that the Participants are
continuing to study gaps between current regulatory data sources and
the Plan as filed. CAT NMS Plan, supra note 3, at Appendix C,
Section C.9; see also SEC Rule 613--Consolidated Audit Trail (CAT)
OATS--CAT Gap Analysis and SEC Rule 613--Consolidated Audit Trail
(CAT) Revised EBS--CAT GAP Analysis, available at http://www.catnmsplan.com/gapanalyses/index.html.
    \530\ The Commission notes that Rule 613 does not require the
inclusion of this information. This information did not exist at the
time the Commission adopted Rule 613 and such information on
exchange trades does not exist today. The Commission expects that
the requirements discussed in Section 3 of Appendix D of the Plan
would result in the inclusion of this information in the CAT Data.
    \531\ See SEC Rule 613--Consolidated Audit Trail (CAT) Revised
EBS--CAT GAP Analysis, available at http://www.catnmsplan.com/gapanalyses/p450537.pdf.
    \532\ See CAT NMS Plan, supra note 3, at Appendix D, Section 3.
---------------------------------------------------------------------------

b. Accuracy
    This Section analyzes the expected effect of the CAT NMS Plan, if
approved, on the accuracy of the data available to regulators.\533\ In
general, the Commission preliminarily believes that the requirements in
the CAT NMS Plan for collecting, consolidating, and storing the CAT
Data in a uniform linked format, the use of consistent identifiers for
Customers, and the focus on sequencing would promote data accuracy.
---------------------------------------------------------------------------

    \533\ As discussed above and in the Adopting Release, accuracy
refers to whether the data about a particular order or trade is
correct. See Adopting Release, supra note 9, at 45727.
---------------------------------------------------------------------------

    The Commission notes that the full extent of improvement that would
result from the Plan is currently unknown, because the Plan defers many
decisions relevant to accuracy until the Plan Processor publishes the
Technical Specifications and interpretations.\534\ In particular, the
CAT NMS Plan specifies that the ``[t]echnical Specifications shall
include a detailed description of . . . each data element, including
permitted values, in any type of report submitted to the Central
Repository'' \535\ and ``the Plan Processor shall have sole discretion
to amend and publish interpretations regarding the Technical Specifica-
tions.'' \536\ This leaves open precise definitions and parameters for
the data fields to be included in CAT Data.\537\
---------------------------------------------------------------------------

    \534\ See CAT NMS Plan, supra note 3, at Section 6.9.
    \535\ Id. at Section 6.9(b)(v).
    \536\ The CAT NMS Plan provides details regarding how the
responsibility for these decisions would be shared between the
Operating Committee and the Plan Processor, with the Plan Processor
having responsibility for data definitions and interpretations. See
CAT NMS Plan, supra note 3, at Section 6.9(c)(i).
    \537\ For example, the completeness Section notes that the open/
close indicator for equities does not exist in current data sources
(see Section IV.E.1.a(2)). The accuracy of the open/close indicator
would be subject to Plan Processor discretion, because the Plan
Processor would have responsibility for defining the permitted
values and interpreting when CAT Reporters would use such permitted
values and the Plan Processor would not have guidance from previous
data sources on how to define or interpret such a field. While the
Commission would ultimately be able to correct such
misinterpretations, regulators may not detect such a
misinterpretation until the misinterpretation harms an
investigation, exam, or other analysis. Based on its experience with
short sale indicators, the Commission believes that defining and
interpreting the open/close indicator would be particularly complex.
See SEC, Division of Market Regulation: Responses to Frequently
Asked Questions Concerning Regulation SHO, Question 2.5, available
at http://www.sec.gov/divisions/marketreg/mrfaqregsho1204.htm
(``Regulation SHO FAQs'').
---------------------------------------------------------------------------

    Nonetheless, the Commission preliminarily believes that the Plan
provides some procedural protections to mitigate this uncertainty and
help promote accuracy. For example, the Plan requires that, at a
minimum, the Technical Specifications be ``consistent with
[considerations and minimum standards discussed in] Appendices C and
D,'' and that the initial Technical Specifications and any Material
Amendments thereto must be provided to the Operating Committee for
approval by Supermajority Vote.\538\ Further, all non-Material
Amendments and all published interpretations must be provided to the
Operating Committee in writing at least ten days before publication,
and shall be deemed approved unless two or more unaffiliated
Participants call the matter for a vote of the full Operating
Committee.\539\
---------------------------------------------------------------------------

    \538\ Id. at Section 6.9(a). The Commission notes that the
standards in Appendices C and D do not cover all decisions that
would affect the accuracy of the data.
    \539\ See CAT NMS Plan, supra note 3, at Section 6.9(c)(i).
---------------------------------------------------------------------------

(1) Data Errors
    The CAT NMS Plan specifies a high-level process for handling errors
that includes target Error Rates for data initially submitted by CAT
Reporters and a correction process and timeline. In particular, the
Plan specifies an initial maximum Error Rate, which measures errors by
CAT Reporters and linkage validation errors,\540\ of 5% for reports
received by the Central Repository before the error correction process
and contemplates the reduction of this Error Rate over time. It is
difficult to conclude whether the Error Rates and processes in the CAT
NMS Plan would constitute an accuracy improvement as compared to
current data sources.
---------------------------------------------------------------------------

    \540\ The Commission notes that there is some uncertainty on
whether the Error Rate definition includes any additional errors
attributable to the Plan Processor because the Plan does not
explicitly state whether Plan Processor errors are included in the
Error Rate or not; it is also not clear whether Plan Processor
errors are included in linking errors. See id. at Article VI,
6.1(n)(v) n.1; Appendix C, Section A.3(b), n.102. Additional
uncertainty exists because the Operating Committee would determine
the details regarding error definitions in the Technical
Specifications after the Plan is approved.
---------------------------------------------------------------------------

    The Plan states that 5% is an appropriate initial Error Rate, to
allow CAT Reporters the opportunity to get used to a new reporting
regime, and that the Error Rate should be reduced over time, with goal
of a 1% Error Rate to be achieved one year after each new category of
Reporters is required to begin reporting.\541\ This was determined
based on Participants' experience with OATS. The initial rejection
rates for OATS when it was initially implemented was 23%,\542\ although
more recent experience with OATS reporting indicates error rates below
3% following the implementation of additional OATS upgrades over the
past 10 years and a current error rate of less than 1%.\543\
---------------------------------------------------------------------------

    \541\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(b).
    \542\ See id. at Appendix C, Section A.3(b), n.106.
    \543\ See Memorandum to File No. S7-11-10 regarding Telephone
Conferences with FINRA (April 17, 2012) available at http://www.sec.gov/comments/s7-11-10/s71110-116.pdf.
---------------------------------------------------------------------------

    But, because the current OATS error rate is below 1%, the
Commission preliminarily believes that the initial

percentage of errors in CAT would be higher than current percentage of
errors in OATS, though the OATS error rate may not be directly
comparable to the Error Rate in the Plan.\544\ Given the magnitude of
CAT, the fact that many CAT Reporters would be new to audit trail
reporting, and that options would be covered for the first time, the
Participants believe that 5% is an appropriate initial Error Rate.\545\
And the Plan injects some uncertainty by asserting that this initial 5%
rate is subject to the quality assurance testing period to be performed
prior to launch, and then again before each new batch of CAT Reporters
are brought online.\546\ In time, the rate could be lowered, but it
also could be raised.
---------------------------------------------------------------------------

    \544\ See Section IV.D.2.b(2)A, supra, for discussion of current
regulatory data error rates. It is important to note that both the
1% OATS error rate and the 5% proposed CAT Error Rate represent
error rates measured at initial data submission. Furthermore, some
situations that do not qualify as an error in OATS (i.e., a route
that cannot be linked because the routing destination is not
required to report OATS) would qualify as an error under CAT.
Furthermore, error rates after data correction are not known for
OATS, and are anticipated to be ``de minimis'' under CAT, as
discussed in note 547, infra. Finally, definitions of ``error'' for
both OATS and CAT Data are dependent on proscribed data validation
checks; if data is reported and passes validation checks, it is
assumed to be correct. When validation checks are exhaustive and
stringent, error rates are expected to be higher than when
validation checks are minimal. Consequently, the Commission is
cautious in directly comparing OATS reported and proposed CAT Error
Rates.
    \545\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(b). See also Section IV.H.2.b, infra for a discussion and
solicitation of comment on alternative Error Rates.
    \546\ See id. at Appendix C, Section A.3(b).
---------------------------------------------------------------------------

    The Plan specifies an error correction process after initial
reports are received and indicates that practically all errors
identifiable by the validations used in the error correction process
would be corrected by 8:00 a.m. Eastern Time on day T+5, stating that
errors are expected to be ``de minimis'' after the error correction
period.\547\ Specifically, the Plan Processor must run initial
validation checks on the data by noon eastern time on day T+1 (four
hours after the submission deadline for the data). Those validation
checks must be published in the Technical Specifications (as discussed
further below) and have the objective to ensure that data is accurate,
timely, and complete as near as possible to the time of submission.
Once errors are identified, the Plan Processor must accept corrections
via manual web-based entry and via batch uploads. Although there is a
specific timeframe for performing these corrections, the Plan Processor
must accept error corrections at any time.\548\
---------------------------------------------------------------------------

    \547\ See id. at Appendix C, Section A.3(b) n.102. ``De
minimis'' is not defined and no numerical Error Rate is given. The
Plan also includes a compliance program intended to help achieve
this goal.
    \548\ See Section IV.E.1.d, infra. The RFP requested that
Bidders provide information on how data format and context
validations for order and quote events would be performed and how
errors would be communicated to CAT Reporters; a system flow diagram
showing how and when different types of validations would be
completed; and how Customer information would be validated. Bidders
noted that the validations would be performed via rules engines
(using standard data validation techniques like format checks, data
type checks, consistency checks, limit and logic checks, or data
validity checks), and processing would be done in real time during
data ingestion. The Plan Processor would be required to perform
validations within three specified categories, which must be set out
in the Technical Specifications document: File Validations
(confirmation that the file is received in the correct format);
Validation of CAT Data (checks of format, data type, consistency,
range/logic, data validity, completeness, and timeliness); and
Linkage Validation (checking the ``daisy chain''). See CAT NMS Plan,
supra note 3, at Appendix D, Section 7.2. If errors are found, the
data would be stored in an error database and notification sent to
the CAT Reporter.
---------------------------------------------------------------------------

    Rather than providing details on the validations that would occur,
however, the Plan provides high-level requirements for the validations
and delegates the detailed design of the specific validations to the
Plan Processor (with the involvement of the Operating Committee and the
Advisory Committee).\549\ Additionally, the Plan does not provide the
level of detail necessary to verify whether the CAT validation process
would run the same validations as OATS, whether current validations
would be relevant, and what validations, if any, would be added.
---------------------------------------------------------------------------

    \549\ See CAT NMS Plan, supra note 3, at Appendix D, Section 7.2
(discussing validation requirements); see also id. Appendix C at
Section A.3(b) (delegating responsibility regarding measurement of
Error Rates to the Plan Processor).
---------------------------------------------------------------------------

    As noted above, it is therefore difficult to conclude whether the
Error Rates and processes in the CAT NMS Plan would constitute an
accuracy improvement as compared to current data sources. With respect
to OATS, FINRA currently performs over 152 validation checks on each
order event reported.\550\ After corrections, approximately 1-2% of
each day's recorded events remain unmatched (i.e., multi-firm events,
such as order routing that cannot be reconciled).\551\ However, the
Commission is not certain that those error rates are directly
comparable to the Error Rates permitted for CAT Data in the Plan given
the increased scope and level of linkages specified in the Plan, and
the new, large, and untested system. The Commission is not aware of
other systems that track and record similar error rates, although the
Commission does experience issues with errors contained in other
sources of data when the Commission attempts to use that data.
Accordingly, the Commission is unable to conclude whether the Error
Rates and processes in the Plan would constitute an accuracy
improvement compared to current data.
---------------------------------------------------------------------------

    \550\ See Adopting Release, supra note 9, at 45729.
    \551\ Id. at 45778.
---------------------------------------------------------------------------

(2) Event Sequencing
A. Clock Synchronization
    Rule 613(d)(1) and (2) requires that the CAT NMS Plan require that
the business clocks of Participants and their members be synchronized
to a specified standard of precision and for protocols to be in place
for that standard to be maintained over time. Complying with this clock
synchronization standard will require that, for the purpose of
recording the date and time of Reportable Events, the business systems
of Participants and their members be synchronized consistently with
``industry standards.'' The Commission did not define the term
``industry standard'' in Rule 613, though it noted that it expected the
Plan to ``specify the time increment within which clock synchronization
must be maintained, and the reasons the plan sponsors believe this
represents the industry standard.'' \552\
---------------------------------------------------------------------------

    \552\ See Adopting Release, supra note 9, at 45774.
---------------------------------------------------------------------------

    The CAT NMS Plan describes the ``industry standard'' in this
context in terms of the technology adopted by the majority of the
industry.\553\ The Plan therefore bases its clock synchronization
standard on current practices of the broker-dealer industry generally
and provides that one standard would apply to all CAT Reporters.
Specifically, Section 6.8(a) of the CAT NMS Plan requires CAT Reporters
to synchronize their time clocks to the time maintained by the NIST
with an allowable clock offset of 50 milliseconds, which the Plan
determines is consistent with the current industry standards, as
defined in the Plan. The Plan further requires annual review of the
clock synchronization standard to evaluate its achievement of the
Plan's goals related to clock synchronization. Section 6.8(c) of the
Plan requires the Chief Compliance Officer to annually evaluate the
clock offset tolerance and to make recommendations to the Operating
Committee regarding whether industry standards have evolved such that
the standard in Section 6.8(a) should be shortened.\554\
---------------------------------------------------------------------------

    \553\ See CAT NMS Plan, supra note 3, at Appendix C, Section
12(p).
    \554\ See id. at Section 6.8.(c) and Appendix C, Section A.3.(c)

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

    The Commission preliminarily believes that the clock
synchronization standards in the CAT NMS Plan are reasonably designed
to improve the accuracy of market activity sequencing by increasing the
percentage of order events that could be chronologically sequenced
relative to other order events,\555\ but notes that the improvements to
the percentage of sequenceable order events by Plan standards are
modest and the requirements of the Plan may not be sufficient to
completely sequence the majority of market events relative to all other
events.
---------------------------------------------------------------------------

    \555\ Independent of the potential time clock synchronization
benefits, the order linking data that would be captured in CAT
should increase the proportion of events that could be sequenced
accurately. This reflects the fact that some records pertaining to
the same order could be sequenced by their placement in an order
lifecycle (e.g., an order submission must have occurred before its
execution) without relying on time stamps. This information may also
be used to partially sequence surrounding events.
---------------------------------------------------------------------------

    As discussed in the Baseline Section, 39% of the broker-dealers
responding to the FIF Clock Offset Survey currently synchronize their
clocks to a clock offset tolerance of greater than 50
milliseconds.\556\ Accordingly, the 50 millisecond requirement for all
CAT Reporters (except on manual order handling systems) would result in
the availability of more precise time stamps from many broker-dealers
\557\ and would increase the number of order events that could be
accurately sequenced relative to each other.
---------------------------------------------------------------------------

    \556\ See Section IV.D.2.b(2)B.i, supra (reporting results of
this survey); see also FIF Clock Offset Study, supra note 127.
    \557\ As noted above, FINRA has indicated that it is considering
proposing a rule change that would require a 50 millisecond clock
offset tolerance. If this rule change is proposed and approved, more
entities would record time stamps with data at a 50 millisecond
clock offset tolerance regardless of whether the CAT NMS Plan is
approved.
---------------------------------------------------------------------------

    To evaluate the proportion of order events that could be sequenced
with the clock offset tolerance specified in the CAT NMS Plan, the
Commission has conducted an analysis of the frequency of market events
occurring within 100 milliseconds of an event in a different trading
venue in the same security.\558\ Table 5 (CAT and Current Clock Offset
Tolerance) shows the percentage of events for listed equities and
options that could be accurately sequenced with one-second and 50-
millisecond clock offset tolerances.
---------------------------------------------------------------------------

    \558\ The methodology to calculate these frequencies starts with
the steps described in supra note 438 and then subtracts the result
from one to get the percentage of unrelated orders that could be
sequenced. This assumes that consecutive unrelated events within
twice the clock offset tolerance cannot be sequenced. An unrelated
event is an order event at a different venue.

                                 Table 5--CAT and Current Clock Offset Tolerance
----------------------------------------------------------------------------------------------------------------
                                                                                % of Unrelated order events
----------------------------------------------------------------------------------------------------------------
     Minimum time between adjacent events            Clock offset tolerance        Equities (%)     Options (%)
----------------------------------------------------------------------------------------------------------------
2 seconds.....................................  1 second........................            1.31            6.97
100 milliseconds..............................  50 milliseconds.................            7.84           18.83
----------------------------------------------------------------------------------------------------------------

    The analysis finds that the current FINRA one-second clock offset
tolerance allows only 1.31% of unrelated order events for listed
equities and 6.97% of unrelated order events for listed options to be
sequenced. The proposed 50-millisecond clock offset tolerance could
accurately sequence 7.84% for listed equities and 18.83% for listed
options of such events included in the MIDAS data. This analysis
overestimates the portion of unrelated events that the proposed clock
synchronization standard could sequence because the analysis includes
only trade and quote events observable in the MIDAS data. The data
currently available to the Commission provides only a rough and
upwardly-biased estimate of how many of these events could be sequenced
by the order data that would be captured by the CAT. In sum, the
results of the Commission's analysis suggest that the standards
required by the Plan do represent an improvement over current standard
but that the majority of market events would remain impossible to
sequence based on the Plan's required clock synchronization standards.
    This analysis does not consider events in OTC Equity Securities.
The Commission believes that the proposed clock synchronization
standard could accurately sequence a higher proportion of unrelated
events in OTC Equity Securities because OTC Equity Securities trade
less frequently than NMS equities and unrelated order events may be
less frequent in OTC Equity Securities than in listed equities. The
Commission therefore preliminarily believes that the proposed 50
millisecond clock offset tolerance in the CAT NMS Plan could improve
accuracy by modestly increasing the number of events that could be
sequenced in OTC Equity Securities.
    The Plan acknowledges that the required clock offset tolerance,
which is based on its determination of the current industry standard,
would not be sufficient to accurately sequence all order events by
their time stamps alone.\559\ In particular, the Plan states that
``[f]or unrelated events, e.g., multiple unrelated orders from
different broker-dealers, there would be no way to definitively
sequence order events within the allowable clock drift as defined in
Article 6.8.'' \560\ This in turn limits the benefits of CAT in
regulatory activities that require event sequencing, such as the
analysis and reconstruction of market events, as well as market
analysis and research in support of policy decisions, in addition to
examinations, enforcement investigations, cross-market surveillance,
and other enforcement functions.
---------------------------------------------------------------------------

    \559\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c). Order events occurring within a single system using the same
time clock could be accurately sequenced by their time stamps,
assuming that their time stamps are not identical. The CAT NMS Plan
does not specify the approach that would be used to sequence events
when time stamps are identical or indicate how this decision would
be made.
    \560\ Id. at n.110. Events involving the same order routed
across systems could be logically sequenced using routing-related
data, because a routed order must be sent before it can be received,
and received before it can be executed. However, the Plan would not
facilitate the accurate sequencing of events that occur in different
systems within 100 milliseconds of each other (twice the clock
offset tolerance) that are not linked using a parent-child order
relationship. The CAT NMS Plan does not provide a solution that will
sequence these events, but recognizes the issue and states that
``the Participants plan to require that the Plan Processor develop a
way to accurately track the sequence of order events without relying
entirely on time stamps.'' See CAT NMS Plan, supra note 3, at
Appendix C, Section A.3(c).
---------------------------------------------------------------------------

    The Plan discusses its determination of the current industry
standard and specifies implementation requirements for the clock
synchronization standards in Appendix C.\561\ As noted above, the

Plan bases industry standards on current practices of the broker-dealer
industry, which are derived from a survey of broker-dealers, and on the
assumption that a change in industry standards would be premised on
``the extent existing technology that synchronizes . . . clocks with a
lower tolerance . . . becomes widespread enough throughout the industry
to constitute a new standard.'' \562\
---------------------------------------------------------------------------

    \561\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c).
    \562\ Id.
---------------------------------------------------------------------------

    The Commission notes however, that the current practices for
exchanges and Execution Venues may differ from the industry standard
for broker-dealers as defined in the Plan, and current practices for
certain systems within broker-dealers may vary by the system within the
broker-dealers. As noted in the Baseline Section, the Commission does
not have precise information on the clock synchronization standards on
exchange and ATS matching engines and quoting systems, but exchanges
may currently synchronize their clocks to a 100 microsecond or less
clock offset tolerance, and have an average clock offset of 36
microseconds.\563\ By defining industry standards based on practices of
the broker-dealer industry generally, the Plan does not account for
these differences. Further, defining industry standards by majority
practices may have the unintended effect of setting a standard that
delays adopting advances in technology.
---------------------------------------------------------------------------

    \563\ See supra notes 435 and436.
---------------------------------------------------------------------------

    Despite these limitations, it is worth noting that the Plan
requires the CCO of the Plan Processor to develop and conduct an annual
assessment of Business Clock synchronization.\564\ Moreover, Plan
Participants must require Industry Members to certify periodically that
their Business Clocks comply with the clock synchronization standard
and that any violations thereof are reported to the Plan Processor and
the Plan Participant.\565\ Thus, the Commission believes that these
provisions would help ensure that the benefits of clock synchronization
are maintained.
---------------------------------------------------------------------------

    \564\ See CAT NMS Plan, supra note 3, Section 6.2(a)(v)(M).
    \565\ See id. at Section 6.8(a)(ii) and (iii).
---------------------------------------------------------------------------

B. Time Stamp Granularity
    The Commission preliminarily believes that the minimum time stamp
granularity required by the Plan would result in some improvement in
data accuracy, but that the level of improvement could be limited.
Despite the modest level of direct improvements expected from the
Plan's minimum time stamp granularity standards, the Commission
preliminarily believes that the Plan should continue to have a time
stamp granularity standard because the Plan provides a mechanism for
making future improvements and monitoring whether more granular time
stamps would provide better quality CAT Data and be feasible given
technology improvements.
    The level of precision or granularity with which time stamps are
recorded has significant implications for the usability of audit trail
data in terms of sequencing events, matching records, and linking the
data to other data sources. In some current regulatory data, the
relative lack of time stamp granularity standards for data reporters
could lead to difficulties in accurately sequencing events or linking
data with other data sources. Rule 613(d)(3) requires that CAT
Reporters record time stamps to reflect current industry standards and
be at least to the millisecond.\566\ Furthermore, the Plan requires
Participants to adopt rules requiring that CAT Reporters that use time
stamps in increments finer than milliseconds use those finer increments
when reporting to the Central Repository.\567\ Consistent with Rule
613, Section 6.8(b) of the CAT NMS Plan requires millisecond or less
time stamps. However, the Commission granted exemptive relief for
manual orders to be recorded at the granularity of one second or
better.\568\ Further, pursuant to Rule 613, if a CAT Reporter's system
already utilizes time stamps in increments less than the minimum
required by the Plan, the CAT Reporter must record time stamps in such
finer increments.\569\
---------------------------------------------------------------------------

    \566\ 17 CFR 242.613(d)(3). This requirement does not apply to
certain Manual Order Events, which are exempted from the requirement
and are captured at one-second increments. Time stamp granularity on
manual order events is discussed separately in the Alternatives
Section.
    \567\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c).
    \568\ See CAT NMS Plan, supra note 3, at Section 6.8(b) and
Appendix C, Section A.3(c) (explaining that recording Manual Order
Events at the millisecond level would be costly and ultimately
arbitrary or imprecise due to the human interaction); see also
Exemption Order, supra note 18, at 11868-9.
    \569\ Id.
---------------------------------------------------------------------------

    The Plan asserts that the millisecond increment required for CAT
Data reflects the industry standard level of granularity.\570\ As noted
in the discussion of clock synchronization, the Commission did not
define the term ``industry standard'' in Rule 613. The Plan therefore
bases its standard for time stamp granularity on current practices of
the broker-dealer industry generally, and provides that one standard
would apply to all CAT Reporters. There appears to be a wide divergence
of industry standards in practice, ranging from full seconds to
microseconds for latency-sensitive applications, and the Plan describes
the slower systems as mostly older ones that cannot support a finer
time stamp granularity.\571\ Many of the systems from which regulators
currently obtain data already capture time stamps in increments of
milliseconds or less. For example, OPRA allows for time stamps in
nanoseconds, and the other SIPs require time stamps in microseconds for
equity trades and quotes.\572\ However, OATS and EBS do not. Current
OATS rules require time stamps to be expressed to the nearest second,
unless the member's system expresses time in finer increments; and as
of September 2014, approximately 12% of OATS records contain time
stamps greater than one millisecond. EBS records either do not contain
times or express time stamps in seconds.\573\
---------------------------------------------------------------------------

    \570\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(c).
    \571\ Id. Because older technology cannot support finer time
stamp increments, members with older systems would incur significant
effort and cost to upgrade those systems to support reporting data
in milliseconds. The newest systems support finer increments, but
include mostly the subset of systems dealing with low latency
trading. Electronic Order Handling and Trading systems are commonly
set at the millisecond level; see, e.g., FIF Letter.
    \572\ See Section IV.D.2.b(2), supra.
    \573\ Id.
---------------------------------------------------------------------------

    Thus, to the extent that some current data sources report time
stamps in increments coarser than a millisecond, which is the case for
12% of OATS records and all EBS records, the Commission expects the CAT
millisecond time stamp requirement to improve data, and thereby allow
regulators to more accurately determine the sequence of market events
relative to surrounding events.
    The Commission preliminarily believes, however, that benefits from
the more granular time stamps could be limited by the level of clock
synchronization required by the Plan. In particular, the Commission
believes that time stamp granularity would not be the limiting factor
in sequencing accuracy, because recording events with time stamps with
resolutions of less than one millisecond cannot help to sequence events
occurring on different venues with clocks that may be 100 milliseconds
out of sync due to clock synchronization offsets.\574\ Therefore,

the benefits of time stamping order events at increments finer than a
millisecond would be limited without also improving the clock
synchronization standards of the Plan.
---------------------------------------------------------------------------

    \574\ For example, under the requirements in the Plan, an order
event at Broker-Dealer A could have a time stamp that is 1
millisecond sooner than an order event at Broker-Dealer B even if
the event at Broker-Dealer B actually occurred 99 milliseconds
sooner. This could occur if Broker-Dealer A's systems are recording
times 50 milliseconds ahead of NIST while Broker-Dealer B's systems
are recording times 50 milliseconds behind NIST. Both broker-
dealers' systems would be within the Plan's allowable clock
synchronization tolerance.
---------------------------------------------------------------------------

(3) Linking and Combining Data
    The Commission believes the requirements of Rule 613 and the Plan
related to data linking would result in improvements to the accuracy of
the data available to regulators, but the extent of the improvement
would depend on the accuracy of the linking algorithm and the
reformatting process that the Plan Processor would eventually develop.
    As discussed in the Baseline, data is currently stored in multiple
formats, is difficult to merge, and results in errors during the
merging process. Moreover, in some cases, the data sources do not
capture the information necessary to link records, while in other cases
linking must be done with algorithms that accomplish the linking with
some degree of error.
    Rule 613(e)(1) generally requires the creation and maintenance of a
Central Repository that would receive, consolidate, and retain
information reported to the CAT.\575\ Further, the rule requires that
the Central Repository store and make available to regulators data in a
uniform electronic format and in a form in which all events pertaining
to the same originating order are linked together in a manner that
ensures timely and accurate retrieval of information reported to the
CAT.\576\
---------------------------------------------------------------------------

    \575\ 17 CFR 242.613(e)(1); see also CAT NMS Plan, supra note 3,
at Section 6.5(a) and (b).
    \576\ 17 CFR 242.613(e)(1).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the requirement that
data be stored in a uniform format would eliminate the need for
regulators who are accessing the data to reformat the data. As noted in
the Baseline Section above, regulators face delays and inaccuracies
when attempting to reformat and link data from multiple sources, such
as linking trade blotters from several broker dealers with SRO audit
trails. Given that the reformatting of CAT Data would be accomplished
by individuals that likely specialize in this activity and that
repetitively do so in a prescriptive and formalized way, this
requirement could reduce the errors that could be introduced in the
current regime where reformatting data is often done on an ad hoc basis
by regulatory Staff who need to work with the data.\577\ In other
words, the Plan Processor would develop a reformatting process by
working with CAT Reporters to build an expertise in harmonizing the
various formats that it receives from Reporters. The Plan Processor
could then build, test, and refine the reformatting process with the
ability to go back to the CAT Reporters for further clarification. Even
if only one Staff member at each SRO or Affiliated Participant
developed the expertise necessary to reformat each of the various
formats and ran a reformatting process on order data, this would result
in a duplication of efforts compared to one centralized entity (the
Plan Processor) developing the expertise and running the reformatting
process. Storing data in a linked format removes the need for
regulators to link information from multiple lifecycle events of an
order or orders themselves, which could further reduce errors and
increase the usability of the data. The Commission recognizes, however,
that despite the potential improvements, the CAT Data could still
contain errors introduced in the reformatting and linking processes.
---------------------------------------------------------------------------

    \577\ Whether errors would decrease depends on the actual
formatting process used.
---------------------------------------------------------------------------

    The process for linking orders designated in the CAT NMS Plan is
similar to the process FINRA currently uses to link OATS records across
market participants. However, the Plan would significantly improve the
ability of regulators to link order events compared to OATS, and would
link this activity to specific customers unlike current audit trail
data.\578\ CAT Reporters must report a series of unique identifiers
that are designed to allow records of events that occur over the
order's lifecycle to be linked together to determine how the order was
handled and how the order interacted with other orders.\579\ The Plan
Processor must then create the initial linkages in the submitted data;
unlike in OATS, the Plan Processor would verify these linkages as part
of its data validity checks.\580\ In general, the CAT NMS Plan would
link orders using the ``daisy chain approach,'' where CAT Reporters
assign their own identifiers to each order event that the Plan
Processor later replaces with a single identifier (the CAT Order-ID)
for all order events pertaining to the same order.\581\ The Central
Repository at a minimum must be able to create linkages between all
order events that are internalized, between the Customer execution and
a proprietary order in the case of a riskless principal transaction,
between two broker-dealers, between a broker-dealer and an exchange,
and vice versa, between executed orders and trade reports, between
various legs of option/equity complex orders, and between order events
for all equity option order handling scenarios that currently are or
could potentially be used by CAT Reporters.\582\
---------------------------------------------------------------------------

    \578\ As discussed above, the Commission notes that SRO audit
trails typically do not provide customer information but a recent
FINRA rule change requires its members to report to OATS non-FINRA
member customers who are broker-dealers. See supra note 407.
    \579\ See id. at Section 6.3(d)(i) through (vi).
    \580\ These data validations are to be established in a
Technical Specifications document by the Plan Processor.
Consequently, it is as yet unclear precisely how that process would
occur. See id. at Appendix D, Section 7.2; Appendix C, Section
A.3(a) (validations ensure that data is submitted in required
formats and that lifecycle events can be accurately linked).
    \581\ See id. at Appendix D, Section 3.
    \582\ See id.
---------------------------------------------------------------------------

    Unlike OATS data, CAT Data would be less prone to breaking the
order lifecycle chain when an order is sent across market participants
because the order lifecycle linking procedure across reporters would be
uniform and all industry participants would be reporters.\583\
Currently, linking procedures across SROs are not uniform, which
complicates reconstructing order lifecycles. Furthermore, because some
broker-dealers are not required to report to OATS, these broker-
dealers' activity cannot be completely reconstructed from audit trail
data, and therefore, orders that they handle cannot be traced through
their lifecycle, effectively severing the links between the order being
received and the order's final disposition. Furthermore, as covered
elsewhere, unlike other data sources, CAT Data would link orders to
Customers because the Plan requires the order lifecycle to be linked
back to the original Customer, and the Plan Processor must be able to
fix linkages when error correction files are submitted.\584\ While the
success of such a matching process is dependent on the accurate
reporting of order linkages by CAT Reporters,\585\ Appendix D directs
the Plan Processor to ensure that breaks in certain lifecycle linkages
must not cause the entire lifecycle to break or

cause a CAT Reporter that correctly reports information to have its
submission rejected.\586\
---------------------------------------------------------------------------

    \583\ See Section IV.D.2, supra.
    \584\ See id.
    \585\ For example, assume two broker-dealers handle an order
that is ultimately executed on an exchange. Broker-Dealer A receives
the order, and transmits it to Broker-Dealer B, that routes it to
Exchange C where it is executed. In order for the Plan Processor to
link these three order events, Broker-Dealer A would need to report
the order and its routing to Broker-Dealer B; B would need to
correctly echo A's order ID in its CAT reporting and its route to
Exchange C, and C would need to correctly echo Broker-dealer B's
order ID in its CAT reporting.
    \586\ See CAT NMS Plan, supra note 3, at Appendix D, Section
7.3. The Commission also notes that, even if all CAT Reporters
provide the required linking information, the success of the linking
process would depend in part on the approach taken by the Plan
Processor and whether or not that approach results in errors.
---------------------------------------------------------------------------

    The CAT NMS Plan does not provide sufficiently detailed information
for the Commission to estimate the likely Error Rates associated with
the linking process required by the CAT NMS Plan. Indeed, the 5% Error
Rate covers data from CAT Reporters, but the Plan Processor could
create errors as well, for example, through the linking process.
Further, the Plan does not include details on how the Plan Processor
would perform the linking process, identify broken linkages, and seek
corrected reports from CAT Reporters to correct broken linkages.
Instead, the Plan defers key decisions regarding the validation process
until the selection of a Plan Processor and the development of
Technical Specifications.\587\ Accordingly, while the centralized
linking should generally promote efficiencies and accuracies in
linking, these uncertainties make it difficult for the Commission to
gauge the degree to which the process for linking orders across market
participants and SROs would improve accuracy compared to existing data,
including OATS.\588\
---------------------------------------------------------------------------

    \587\ The CAT NMS Plan describes the Plan Processor's
responsibility for creating the Technical Specifications. See CAT
NMS Plan, supra note 3, at Section 6.9.
    \588\ The Commission notes that the Plan Processor is required
to create a quality assurance testing environment in which, during
industry-wide testing, the Plan Processor provides linkage
processing of data submitted, the results of which are reported back
to Participants and to the Operating Committee for review. See CAT
NMS Plan, supra note 3, at Appendix D, Section 1.2. This may help
identify challenges in the linking process and allow for their early
resolution.
---------------------------------------------------------------------------

    Uncertainties also prevent the Commission from determining whether
the process for converting data into a uniform format at the Central
Repository would improve the accuracy of the data over existing audit
trail accuracy rates. The Plan includes two alternative approaches to
data conversion. In the first, called Approach 1, CAT Reporters would
submit data to the Central Repository in an existing industry standard
protocol of their choice such as the Financial Information eXchange
(``FIX'') protocol. In Approach 2, CAT Reporters would submit data to
the Central Repository in single mandatory specified format, such as an
augmented version of the OATS protocol. Under Approach 1, the data must
be converted into a uniform format at the Central Repository in a
second step. Under Approach 2, the data is already in a uniform format
at the time of submission. The Plan defers the decision regarding which
approach to take until the selection of a Plan Processor and the
development of Technical Specifications.
    The Commission preliminarily believes that Approach 1 would likely
result in a lower Error Rate than Approach 2. Under Approach 1, the CAT
Reporters would presumably be submitting the actual data captured in
real time without having to translate it into another format. In
addition, under Approach 1, the conversion would be performed at the
Central Repository by the Plan Processor, rather than the conversion
being performed by each of the approximately 1,800 individual CAT
Reporters or their vendors, which should reduce potential points where
errors in formatting could be introduced, and provide for economies of
scale.\589\ This would likely result in increased efficiency and
accuracy due to specialization by the Plan Processor. However, while
the Commission preliminarily believes that Approach 1 is likely to
result in greater data accuracy than Approach 2, because of
uncertainties regarding expected Error Rates and error rates in current
data, the Commission is unable to evaluate the degree to which that
approach would improve data accuracy relative to currently available
data.\590\
---------------------------------------------------------------------------

    \589\ The Commission understands that a large proportion of
reports that fail OATS validation checks do so because of errors in
the translation of the data by the OATS reporter.
    \590\ The Plan Processor is required to have policies and
procedures, including standards, to ensure the accuracy of the
consolidation by the Plan Processor of the data, per Rule
613(e)(4)(iii), which could mitigate errors as well. 17 CFR
242.613(e)(4)(iii).
---------------------------------------------------------------------------

    Uniquely complex situations also pose a difficulty for assessing
the ability of the Plan Processor to build a complete and accurate
database of linked data that regulators could query for regulatory
purposes. First, the Plan requires the Plan Processor, in consultation
with industry, to develop a linking mechanism that would allow the
option and equity legs of multi-leg trades to be linked within the
Central Repository.\591\ Because the mechanism for this linkage is not
yet determined, the Commission cannot assess the degree of the expected
linkage error rate but, given that equities are not linked to options
in current data sources, the Commission expects this feature to
significantly improve the accuracy of linking equities to options.
---------------------------------------------------------------------------

    \591\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.1(b).
---------------------------------------------------------------------------

    Second, the Commission in the Proposing Release noted concern about
the ability of the daisy chain approach to link a Customer order and a
member's order from which the Customer is provided with an
allocation.\592\ The Plan addresses this concern in the definition of
an Allocation Report, which is a report that identifies accounts and
subaccounts to which executed shares are allocated, but that is not
required to be tied to a particular order or execution.\593\ The Report
is required to be submitted to the Central Repository,\594\ but the
lack of linkages in this case could make the resulting data less
useful. Specifically, the content of the Allocation Report and the
order lifecycles must contain content that permits regulators to draw
certain conclusions about subaccount allocations even without a clean
linkage.
---------------------------------------------------------------------------

    \592\ See Proposing Release, supra note 9, at 32576.
    \593\ See CAT NMS Plan, supra note 3, at Section 1.1.
    \594\ See id. at Section 6.4(d)(ii).
---------------------------------------------------------------------------

    While uncertainty about this issue remains, the Commission notes
that the Plan's requirement for standardized Allocation Reports that
consistently and uniquely identify Customers and reporters should
improve the linkability of allocation information compared to current
data, despite the limitation of direct linkage to order lifecycles,
particularly in scenarios where potentially violative conduct is
carried out by market participants operating through multiple broker
dealers. This moderate improvement in the linkability of allocation
data should improve regulators' ability to identify market participants
who commit violations related to improper subaccount allocations.
(4) Customer and Reporter Identifiers
    The Commission preliminarily believes that the inclusion of unique
Customer and Reporter Identifiers described in the CAT NMS Plan would
increase the accuracy of customer and broker-dealer information in data
regulators use and provide benefits to a broad range of regulatory
activities that involve audit trail data.
    Currently, only a few data sources, which typically cover only a
small portion of order lifecycles, include information regarding
customers.\595\ Further, the customer information in these data sources
is often incomplete

and inconsistent and the data is currently only obtainable by
regulators making requests to broker-dealers directly. Additionally,
although broker-dealer identifiers, in the form of MPID numbers, CRD
numbers, and clearing broker numbers, appear within the current sources
of audit trail data, because of the lack of a centralized database and
because these identifiers may vary across exchanges, the Commission
faces challenges in relying on these identifiers to accurately identify
broker-dealer activity across the market.\596\
---------------------------------------------------------------------------

    \595\ See Section IV.D.2.b(1)A, supra. As discussed above, the
Commission notes that SRO audit trails typically do not provide
customer information but a recent FINRA rule change would require
its members to report to OATS non-FINRA member customers who are
broker-dealers. See supra note 407.
    \596\ See Section IV.D.2.b(1)D, supra.
---------------------------------------------------------------------------

    Rule 613 requires the use of a unique Customer-ID that identifies
the Customer involved in CAT Reportable Events.\597\ Based on a concern
that requiring CAT Reporters to report a Customer-ID to the Central
Repository with each order would disrupt existing business practices
and that reporting on that basis could risk the leakage of order and
Customer information into the market,\598\ the Plan requires the Plan
Processor to translate a unique Customer identifier assigned by the
firm to its Customer (the Firm Designated ID) into the Customer-ID to
be used in CAT.\599\ Specifically, the Plan requires CAT Reporters to
provide a Firm Designated ID for each Customer, which is defined as the
unique identifier designated by the broker-dealer for each trading
account for purposes of providing data to the Central Repository.\600\
Upon receipt of the Firm Designated ID, the Plan Processor would be
required to generate and associate one or more Customer-IDs for orders
received by the Customer of the CAT Reporter, which would also be
linked to the relevant Reportable Events for that Customer's order.
Pursuant to the Plan, therefore, the Customer-ID would be generated
from the Firm Designated ID,\601\ and the Plan Processor would create a
unique Customer-ID that would be consistent across that Customer's
activity regardless of the originating broker-dealer.
---------------------------------------------------------------------------

    \597\ Rule 613(c)(7) specifies the event records that would
contain the Customer-ID. 17 CFR 242.613(c)(7). Event records that do
not explicitly capture the Customer-ID could be linked to a record
that does contain this information, typically using the Order-ID.
    \598\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.1.(a)(iii).
    \599\ Id. The Firm Designated ID could be anything, provided
that it is unique across the firm for a given business date.
    \600\ See id. at Section 6.3(d)(i)(A), n.2; see also id. at
Section 1.1.
    \601\ See CAT NMS Plan, supra note 3, at Appendix D, Section 3.
---------------------------------------------------------------------------

    To facilitate the creation of Customer-IDs, certain information
would be submitted to the Central Repository. Specifically, broker-
dealers would be required to submit an initial set of information
identifying a Customer to the Central Repository, including the Firm
Designated ID and the other biographical information associated
therewith including, for an individual, name, address, date of birth,
ITIN/SSN, and individual's role in the account (e.g., primary holder,
joint holder, guardian, trustee, person with power of attorney). With
respect to legal entities, identifying information would include: name,
address, EIN/LEI or other comparable common entity identifier.\602\
Broker-dealers must also submit to the Central Repository daily updates
for reactivated accounts, newly-established or revised Firm Designated
IDs, or other associated reportable Customer information.\603\ The Plan
also calls for periodic refreshes of all Customer information from CAT
Reporters.\604\ And the Plan Processor must have a way to periodically
receive full account lists (i.e., not just the daily changes) to ensure
the completeness and accuracy of the database.\605\
---------------------------------------------------------------------------

    \602\ See id. at Appendix C, Section A.1.(a)(iii); see also id.
at Appendix D, Section 9.1. The CAT NMS Plan further provides, in
the definition of Customer Identifying Information, that where the
LEI or other comparable common identifier is provided, information
covered by such common entity identifier (e.g., name, address) would
not need to be separately submitted to the Central Repository. Id.
at Section 1.1.
    \603\ See id. at Appendix C, Section A.1.(a)(iii).
    \604\ See id. at Appendix C, n.33 and Appendix D, Section 9.1.
    \605\ See id. at Appendix D, Section 9.1.
---------------------------------------------------------------------------

    Based on this information, the Plan Processor has to ``maintain
information of sufficient detail to uniquely and consistently identify
each Customer across all CAT Reporters, and associated accounts from
each CAT Reporter.'' \606\ It is the Plan Processor's responsibility to
document and publish, with the approval of the Operating Committee, the
minimum list of data elements needed to maintain this association.
Appendix D sets forth a list of minimum data elements needed to
identify each Customer across all CAT Reporters, and associated
accounts within a CAT Reporter, including SSN or ITIN, date of birth,
current name, current address, previous name and address; and for legal
entities, the LEI (if available), tax identifier, full legal name, and
address.\607\ The Plan Processor must also support account structures
that have multiple account owners and associated Customer information
(e.g., joint accounts, managed accounts), and must be able to link
accounts that move from one CAT Reporter to another,\608\ so it is
possible that additional data fields would be necessary. Once a
database is established, it must be maintained over time, and provide
ready access to regulators to historical changes to that
information.\609\
---------------------------------------------------------------------------

    \606\ See id. at Appendix C, Section A.1.(a)(iii).
    \607\ See id. at Appendix D, Section 9.1.
    \608\ See id.
    \609\ See id. at Article VI, Section 6.5(b) and (c).
---------------------------------------------------------------------------

    The Commission preliminarily believes that approval of the Plan
would likely further remedy some of the inconsistencies and other
limitations mentioned above. The Plan also contains provisions related
to the accuracy of submitted Customer information. For example, a
robust data validation process must be established for submitted
Customer and Customer Account Information.\610\ There must also be a
robust error resolution process for Customer information. The Central
Repository must be able to accommodate minor data discrepancies (e.g.,
Road versus Rd in an address) on its own, while more substantial
discrepancies (e.g., two different persons with the same SSN) would
need to be transmitted to the CAT Reporter for resolution within the
established error correction timeframe.\611\ While these elements
should help increase the accuracy of Customer identification within
CAT, there are some uncertainties, as the precise methods for
submitting Customer data to the Central Repository, along with
validations, are to be set out in Technical Specifications in the
future.\612\
---------------------------------------------------------------------------

    \610\ See id. at Appendix C, Section A.1.(a)(iii); see also id.
at Appendix D, Section 9.1.
    \611\ See id. at Appendix D, Section 3.
    \612\ See id. at Appendix C, Section A.1.(a)(iii).
---------------------------------------------------------------------------

    In addition to Customer-IDs, the CAT NMS Plan calls for the use of
CAT-Reporter-IDs. The data to be reported to the Central Repository
includes the SRO-assigned Market Participant Identifier (MPID) of the
Industry Member or Participant receiving, routing, or executing the
order.\613\ Upon receipt of the data, the Plan Processor must map the
SRO-assigned MPID to a CAT-Reporter-ID, which would be assigned by the
Plan Processor in the CAT data.\614\ Specifically, the Plan Processor
must be able to assign a CAT-Reporter-ID to all reports submitted to
the Central Repository based on SRO-assigned MPIDs. To the extent that
the different Participants assign the same MPID to different CAT
Reporters, the Plan Processor must be able to properly associate the
correct SRO-assigned

MPIDs with the CAT Reporters.\615\ To do this, the Plan Processor must
develop and maintain a mechanism for assigning CAT-Reporter-IDs based
on the relevant SRO-assigned identifier (MPID, ETPID, or trading
mnemonic) currently used by CAT Reporters in their order handling and
trading processes, and also to change those identifiers should that be
necessary (e.g., in the event of a merger), although changes are
expected to be infrequent.\616\ Moreover, the SROs would have an
obligation to provide all their SRO-assigned MPIDs to the Central
Repository on a daily basis to ensure the accuracy of the information
used to assign the CAT-Reporter-ID. The Plan Processor must capture,
store, and maintain this information in a master/reference database,
similar to how the Plan Processor would handle symbology changes.\617\
Finally, the validity of the SRO-assigned MPID is part of the initial
file validation process upon receipt of a submission from a CAT
Reporter, which should facilitate the accuracy of the Plan Processor's
subsequent assignment of the CAT-Reporter-ID.\618\
---------------------------------------------------------------------------

    \613\ See Exemption Order, supra note 18, at 11863-11865; CAT
NMS Plan, supra note 3, at Sections 6.3(d), 6.4(d).
    \614\ See CAT NMS Plan, supra note 3, at Appendix D, Section 3.
    \615\ See id.
    \616\ See id. at Appendix D, Section 10.1.
    \617\ See id. at Appendix D, Section 2 and Section IV.E.3.b,
infra.
    \618\ See id. at Appendix D, Section 7.2.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the Customer-ID approach
in the CAT NMS Plan would significantly improve the accuracy of
customer information available to regulators. As noted above, existing
data does not consistently capture information about the customers
involved in a trade or other market event, which negatively affects the
ability of regulators to accurately track customers' activities across
broker-dealers. Additionally, customer identities in many existing data
sources use inconsistent definitions and mappings across market
centers. Accordingly, it is difficult for regulators to identify the
trading of a single customer across multiple market participants.\619\
The Customer-ID approach specified in the CAT NMS Plan constitutes a
significant improvement because it would consistently identify the
Customer responsible for market activity, obviating the need for
regulators to collect and reconcile Customer identification information
from multiple broker-dealers. This should reduce the risk of the
introduction of errors into the data by regulators and save a
significant amount of time.
---------------------------------------------------------------------------

    \619\ See Adopting Release, supra note 9, at 45730; see also
Section III.D.2.b(2)D, supra.
---------------------------------------------------------------------------

    Furthermore, the Commission preliminarily believes that the
Reporter ID approach specified in the CAT NMS Plan would improve the
accuracy of tracking information regarding entities with reporting
obligations, namely broker-dealers and SROs. Because the Commission
currently face challenges in using MPIDs and CRD numbers, for example,
to identify broker-dealers across the market, the Plan's requirement
for consistent unique Reporter IDs would eliminate the need for the
Commission to reconcile broker-dealer information from multiple data
sources, which can be a costly task for regulatory Staff that is often
limited in terms of accuracy by the inconsistencies and non-uniqueness
of current identifiers, and facilitate more efficient and effective
regulatory activities that protect investors from harm. Moreover,
because CAT Data would include more Industry Members in the Reporter ID
category than are currently in any current set of broker-dealer
identifiers, the Commission preliminarily believes that approval of the
Plan would likely further remedy some of the inconsistencies and other
limitations mentioned above.
(5) Aggregation
    Most CAT Data would be disaggregated data, meaning that CAT Data
would not suffer from the limitations that characterize some of the
aggregated data sources that regulators must currently use. As
mentioned in the Baseline Section, subaccount allocation data and
issuer repurchase data exist in forms that are aggregated and thus
these data sources are limited for use in certain regulatory activities
and interests.\620\ In particular, neither data type may necessarily
indicate the individual executions. This data feature should promote
more effective and efficient investigation by regulators of subaccount
allocation issues and repurchase activity.
---------------------------------------------------------------------------

    \620\ See Section IV.D.2.b.(2)E, supra. Item 703 of Regulation
S-K requires issuers to report aggregated issuer repurchase data to
the Commission on an annual and quarterly basis in Forms 10-K and
10-Q; see also 17 CFR 229.703 and supra note 451.
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    To meet the requirements of Rule 613, the CAT NMS Plan includes a
required allocation reporting tool that would provide information on
executions that are allocated to multiple subaccounts.\621\ The
Allocation Reports required by the Plan would provide the Firm
Designated ID for any account(s), including subaccount(s) to which
executed shares are allocated, the security that has been allocated,
the identifier of the firm reporting the allocation, the price per
share of shares allocated, the side of shares allocated, the number of
shares allocated to each account, and the time of the allocation.\622\
The Firm Designated IDs could facilitate linking back to the Customer-
ID, so it may not be possible to perfectly link a Customer's aggregated
orders, executions, and allocations for a day.\623\
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    \621\ See CAT NMS Plan, supra note 3, at Section
6.4(d)(ii)(A)(1).
    \622\ See Exemption Order, supra note 18, at 11867.
    \623\ The Commission notes, however, that there may be
allocations made by non-broker-dealers that are difficult to track
if they involve multiple broker-dealers, or are not tracked if they
involve non-CAT-reporters. See Exemptive Request Letter, supra note
16, at 26 n.61.
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    The Commission preliminarily believes that the CAT NMS Plan would
improve the accuracy of allocation data compared to existing data
available to regulators. It would provide disaggregated information on
the identity of the security, the number of shares and price allocated
to each subaccount, when the allocation took place, and how each
Customer subaccount is associated with the master account. This would
more accurately reflect which Customer ultimately received the shares
that were purchased in a particular trade.
    The Commission anticipates that regulators may use CAT Data for
some purposes that they use cleared data for now because CAT is
significantly less aggregated. As discussed above, regulators often
used equity and option cleared reports to identify market participants
involved in trading activity relevant to an investigation.\624\ Because
these are aggregated, regulators can use them to identify clearing
firms that may have higher volume in a particular stock on a particular
day, but the data does not identify actual trades, and, therefore,
regulators make data requests to access the underlying disaggregated
data necessary to identify broker-dealers or customers that may be
involved in the activity under investigation. If the CAT NMS Plan is
approved, CAT Data could be used to identify individual trades and
customers or other market participants who were involved in such
activity with less delay and without requiring ad hoc data requests to
clearing firms identified using equity or option cleared reports.
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    \624\ See Section IV.D.2.a(2), supra.
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    Likewise, the disaggregated issuer repurchase information that
would be in the CAT data would be an improvement in the accuracy of
information available to regulators about those issuer repurchases. In
particular, the Plan would require that the Plan Processor link
Customer information to the order lifecycle and the report would
identify as Customers those issuers that are

repurchasing their stock in the open market.\625\ This would provide
much more granular data than what is available currently for open
market issuer repurchases, which consists of monthly aggregations of
those issuer repurchases.\626\
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    \625\ See CAT NMS Plan, supra note 3, at Section 6.4(d)(iv).
    \626\ See Section IV.D.2.b(2)E, supra for baseline information
on current issuer repurchase data.
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c. Accessibility
    In general, the Commission believes that the Plan, if approved,
would substantially improve the accessibility of regulatory data by
providing regulators with direct access to the consolidated CAT Data,
including some data elements that currently take weeks or months to
obtain. However, there is some uncertainty regarding the process for
regulatory access under the Plan, which creates uncertainty as to the
degree of the expected improvement.\627\
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    \627\ Accessibility refers to how the data is stored, how
practical it is to assemble, aggregate, and process the data, and
whether all appropriate regulators could acquire the data they need.
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(1) Direct Access to Data
    As discussed in the Baseline Section,\628\ one of the significant
limitations of current regulatory data sources is lack of direct
access. Rule 613(e)(1) requires the Central Repository to store and
make available to regulators data in a uniform electronic format and in
a form in which all events pertaining to the same originating order are
linked together in a manner that ensures timely and accurate retrieval
of the information for all Reportable Events for that order.\629\
Additionally, Rule 613(a)(1)(ii) requires that the CAT NMS Plan discuss
the time and method of access by which the data would be made available
to regulators.\630\ The CAT NMS Plan implements this requirement in
Section 6.5(c) \631\ and further describes the direct access methods
and functionality in the discussion of Consideration 2 and in Appendix
D.\632\ Section 6.5(c) requires that the Participants and the
Commission have access to the Central Repository, and access to and use
of the CAT Data stored at the Central Repository, and further requires
a method of access to the data that provides for the ability to run
searches and generate reports, including complex queries. Specifically,
the Central Repository must store 6 years of CAT data in a ``convenient
and usable standard electronic format'' that is ``directly available
and searchable electronically without any manual intervention by the
Plan Processor.'' \633\ This access to the Central Repository is solely
for the purpose of performing regulatory functions and must include the
ability to run searches and generate reports; further, the Plan
requires that the Central Repository shall allow the ability to return
results of queries that are complex in nature, including market
reconstructions and the status of order books at varying time
intervals.\634\ The Central Repository must also maintain valid
Customer and Customer Account Information and permit regulators access
to ``easily obtain historical changes to that information (e.g., name
changes, address changes).'' \635\
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    \628\ See Section IV.D.2.b(3), supra.
    \629\ 17 CFR 242.613(e)(1).
    \630\ 17 CFR 242.613(a)(1)(ii).
    \631\ See CAT NMS Plan, supra note 3, at Section 6.5(c).
    \632\ See id. at Appendix C, Section A.2(b) and (c), Appendix D,
Section 8.
    \633\ See id. at Section 6.5(b)(i).
    \634\ See id. at Section 6.5(c)(ii), Appendix D, Section 8.1.
    \635\ See id. at Appendix C, Section A.1(a)(iii).
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    The Commission recognizes that improving accessibility relative to
the Baseline requires ensuring that enough SRO and Commission Staff
members are able to use the direct access system supplied by the
Central Repository when they need it. The ability to use the direct
access system depends, among other things, on how user-friendly the
system is, whether it has enough capacity for the expected use of the
system, and whether it contains the functionality that the SROs and
Commission Staff require. The Commission preliminarily believes that
the minimum requirements for the direct access system would ensure that
the Plan would improve on the Baseline of access to current data,
including the process of requesting data.
    Appendix D provides minimum functional and technical requirements
that must be met by the Technical Specifications to facilitate these
methods of access, including the methods of selecting data that must be
supported, query and bulk extract performance standards, and formats in
which data could be retrieved.\636\ Specifically, CAT must be able to
support a minimum of 3,000 regulatory users within the system, 600 of
which might be accessing the system concurrently (which must be
possible without an unacceptable decline in system performance) \637\:
20% of the 3,000 users would be daily or weekly users, and 10% would
require advanced regulatory-user access.\638\ Advanced user access
includes the ability to run complex queries (versus basic users who may
only run basic queries).\639\
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    \636\ See id. at Appendix D, Section 8; see also Appendix C,
Section A.2.
    \637\ See id. at Appendix D, Section 8.1.
    \638\ Id.
    \639\ See id. at Appendix D, Section 8.1.1. Both Basic and
Advanced Users may be established by an employee at the regulator
designated to set up access to the system, if the Plan Processor
chooses to do so versus processing it themselves. See id. at
Appendix C, Section D.12(k). However, providing access to PII must
always be done directly by the Plan Processor. Id.
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    Two types of query interfacing must be supported. The first, an
online targeted query tool, must include a date or time range, or both,
and allow users to choose from a broad menu of 26 pre-defined selection
criteria (e.g., data type, listing market, size, price, CAT-Reporter-
ID, Customer-ID, or CAT-Order-ID), with more to be defined at a later
date.\640\ Results must be viewable in the tool or downloadable in a
variety of formats and support at least a result size of 5,000 or
10,000 records, respectively, with a maximum result size to be
determined by the Plan Processor.\641\ The other method for regulator
access to the data is a user-defined direct query or bulk
extraction.\642\ CAT must be able to support at least 3,000 daily
queries, including 1,800 concurrently, and up to 300 simultaneous query
requests with no performance degradation.\643\ Datasets generated by
these direct queries could run from less than 1 GB to at least 10 TB or
more of uncompressed data.\644\
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    \640\ See id. at Appendix D, Section 8.1.1. This is a broad
range of criteria from which to choose, although deferring
additional selection fields to be defined at a later date makes the
precise scope of this tool less certain.
    \641\ See id.
    \642\ See id. at Appendix D, Section 8.2.
    \643\ See id. at Appendix D, Section 8.2.1.
    \644\ See id.
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    The actual method of query support is to be determined by the Plan
Processor, but must provide an open API that allows use of regulator-
supplied common analytic tools (e.g., Python, Tableau) and ODBC/JDBC
drivers.\645\ The Plan Processor is permitted to define a ``limited set
of basic required fields (e.g., date and at least one other field such
as symbol, CAT-Reporter-ID, or CAT-Customer-ID)'' that must be used by
regulators in direct queries.\646\ Direct queries must be able to be
created, saved, and run by regulators (either directly or at a
prescheduled time), with automated delivery of scheduled query
results.\647\ Finally, the Plan Processor must provide data models and
data dictionaries for all processed and unlinked CAT Data, and

the Plan Processor must provide procedures and training to regulators
that would use the direct query feature (although it is up to the Plan
Processor whether to require these training sessions).\648\
Consideration was given to requiring the Plan Processor to create an
online Report Center that would provide pre-canned reports (i.e.,
recurring reports of interest to regulators), but due to the added
complexity and lack of quantifiable use cases, the decision was made
not to proceed. The Plan, however, provides that this decision would be
reassessed when broker-dealers begin submitting data to the CAT.\649\
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    \645\ See id. at Appendix D, Section 8.2. A discussion of the
types of data tools that bidders proposed to support can be found in
Appendix C, Section A.2(b).
    \646\ See id. at Appendix D, Section 8.2.
    \647\ See id. at Appendix D, Section 8.2.1.
    \648\ See id. at Appendix D, Section 8.2.
    \649\ See id. at Appendix D, Section 8.2.2.
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    All queries must be able to be run against raw (i.e., unlinked) or
processed data, or both. A variety of minimum performance metrics apply
to these queries.\650\ The Plan Processor must also provide certain
support to regulatory users. Specifically, it must ``develop a program
to provide technical, operational and business support'' to regulators,
including creating and maintaining the CAT Help Desk to provide
technical expertise to assist regulators with questions and/or
functionality about the content and structure of the CAT query
capability.\651\ The Help Desk must be available 24x7, support email
and phone communication, and be staffed to handle 2,500 calls per month
(although this resource would not be exclusive to regulators; CAT
Reporters could use it as well).\652\ The Plan Processor must also
develop tools, including an interface, to let users monitor the status
of their queries and/or reports, including all in-progress queries/
reports and estimated time to completion.\653\ In addition, the Plan
Processor must develop communication protocols regarding system status,
outages, and other issues affecting access, including access by
regulators to a secure Web site to monitor CAT System status.\654\
Furthermore, the Plan Processor must develop and maintain documentation
and other materials to train regulators, including training on building
and running queries.\655\
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    \650\ See Section IV.E.1.IV.E.1.d(3), infra, for additional for
additional information.
    \651\ See CAT NMS Plan, supra note 3, at Appendix D, Section
10.2.
    \652\ See id. at Appendix D, Section 10.3.
    \653\ See id. at Appendix D, Section 10.2.
    \654\ See id.
    \655\ See id.
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    The Commission preliminary believes that the direct access
facilitated by provisions of the CAT NMS Plan described above is
reasonably designed to substantially reduce the number of ad hoc data
requests and provide access to substantial data without the delays and
costly time and knowledge investments associated with the need to
create and respond to data requests. For example, regulators do not
have direct access to EBS or trade blotter data and therefore they must
request such data when needed for regulatory tasks. As a result, in
2014 the Commission made 3,722 EBS requests that generated 194,696
letters to broker-dealers for EBS data.\656\ Likewise, the Commission
understands that FINRA requests generate about half this number of
letters. In addition, for examinations of investment advisers and
investment companies, the Commission makes approximately 1,200 data
requests per year. If the Plan is approved, the Commission
preliminarily believes that the number of data requests would decline
sharply. In addition to decreasing the amount of time currently
required for regulators to access data sources, direct access to the
CAT Data should decrease the costs that many regulators and market
participants incur in either requesting data or fulfilling requests for
data, such as the time and resources that regulators and data liaisons