[Federal Register Volume 86, Number 140 (Monday, July 26, 2021)]
[Notices]
[Pages 40114-40134]
[FR Doc No: 2021-15810]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92451; File No. 4-698]

Joint Industry Plan; Order Instituting Proceedings To Determine
Whether To Approve or Disapprove an Amendment to the National Market
System Plan Governing the Consolidated Audit Trail

July 20, 2021.

I. Introduction

    On March 31, 2021, the Operating Committee for Consolidated Audit
Trail, LLC (``CAT LLC'' or the ``Company''), on behalf of the following
parties to the National Market System Plan Governing the Consolidated
Audit Trail (the ``CAT NMS Plan'' or ``Plan''): \1\ BOX Exchange LLC;
Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange,
Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange,
Inc., Financial Industry Regulatory Authority, Inc. (``FINRA''),
Investors Exchange LLC, Long-Term Stock Exchange, Inc., Miami
International Securities Exchange LLC, MEMX, LLC, MIAX Emerald, LLC,
MIAX PEARL, LLC, Nasdaq BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC,
Nasdaq MRX, LLC, Nasdaq PHLX LLC, The NASDAQ Stock Market LLC, New York
Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago,
Inc., and NYSE National, Inc. (collectively, the ``Participants,''
``self-regulatory organizations,'' or ``SROs'') filed with the
Securities and Exchange Commission (``SEC'' or ``Commission'') pursuant
to Section 11A(a)(3) of the Securities Exchange Act of 1934 (``Exchange
Act''),\2\ and Rule 608 thereunder,\3\ a proposed amendment (``Proposed
Amendment'') to the CAT NMS Plan to implement a revised funding model
(``Proposed Funding Model'') for the consolidated audit trail (``CAT'')
and to establish a fee schedule for Participant CAT fees in accordance
with the Proposed Funding Model (``Participant Fee Schedule''). The
Proposed Amendment was published for comment in the Federal Register on
April 21, 2021.\4\
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    \1\ The CAT NMS Plan is a national market system plan approved
by the Commission pursuant to Section 11A of the Exchange Act and
the rules and regulations thereunder. See Securities Exchange Act
Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23,
2016).
    \2\ 15 U.S.C. 78k-1(a)(3).
    \3\ 17 CFR 242.608.
    \4\ See Notice of Filing of Amendment to the National Market
System Plan Governing the Consolidated Audit Trail, Release No.
91555 (April 14, 2021), 86 FR 21050 (``Notice''). Comments received
in response to the Notice can be found on the Commission's website
at https://www.sec.gov/comments/4-698/4-698-a.htm.

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    This order institutes proceedings, under Rule 608(b)(2)(i) of
Regulation NMS,\5\ to determine whether to disapprove the Proposed
Amendment or to approve the Proposed Amendment with any changes or
subject to any conditions the Commission deems necessary or appropriate
after considering public comment.
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    \5\ 17 CFR 242.608(b)(2)(i).
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II. Background

    On July 11, 2012, the Commission adopted Rule 613 of Regulation
NMS, which required the SROs to submit a national market system
(``NMS'') plan to create, implement and maintain a consolidated audit
trail that would capture customer and order event information for
orders in NMS securities.\6\ On November 15, 2016, the Commission
approved the CAT NMS Plan.\7\ Under the CAT NMS Plan, the Operating
Committee of the Company, of which each Participant is a member, has
the discretion (subject to the funding principles set forth in the
Plan) to establish funding for the Company to operate the CAT,
including establishing fees to be paid by the Participants and Industry
Members.\8\
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    \6\ 17 CFR 242.613.
    \7\ See supra note 1.
    \8\ The CAT NMS Plan defines ``Industry Member'' as ``a member
of a national securities exchange or a member of a national
securities association.'' See CAT NMS Plan, supra note 1, at Section
1.1. See also id. at Section 11.1(b).
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    The Plan specified that, in establishing the funding of the
Company, the Operating Committee shall establish ``a tiered fee
structure in which the fees charged to: (1) CAT Reporters \9\ that are
Execution Venues,\10\ including ATSs,\11\ are based upon the level of
market share; (2) Industry Members' non-ATS activities are based upon
message traffic; and (3) the CAT Reporters with the most CAT-related
activity (measured by market share and/or message traffic, as
applicable) are generally comparable (where, for these comparability
purposes, the tiered fee structure takes into consideration
affiliations between or among CAT Reporters, whether Execution Venues
and/or Industry Members).'' \12\ Under the Plan, such fees are to be
implemented in accordance with various funding principles, including an
``allocation of the Company's related costs among Participants and
Industry Members that is consistent with the Exchange Act taking into
account . . . distinctions in the securities trading operations of
Participants and Industry Members and their relative impact upon the
Company resources and operations'' and the ``avoid[ance of] any
disincentives such as placing an inappropriate burden on competition
and reduction in market quality.'' \13\
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    \9\ The CAT NMS Plan defines ``CAT Reporter'' as ``each national
securities exchange, national securities association and Industry
Member that is required to record and report information to the
Central Repository pursuant to SEC Rule 613(c).'' Id. at Section
1.1.
    \10\ The CAT NMS Plan defines ``Execution Venue'' as ``a
Participant or an alternative trading system (`ATS') (as defined in
Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of
Regulation ATS (excluding any such ATS that does not execute
orders).'' Id.
    \11\ Id.
    \12\ Id. at Section 11.2(c). See Article XI of the CAT NMS Plan
for additional detail.
    \13\ See CAT NMS Plan, supra note 1, at Section 11.2(b) and (e).
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    On May 15, 2020, the Commission adopted amendments to the CAT NMS
Plan designed to increase the Participants' financial accountability
for the timely completion of the CAT (``Financial Accountability
Amendments'').\14\ The Financial Accountability Amendments added
Section 11.6 to the CAT NMS Plan to govern the recovery from Industry
Members of any fees, costs, and expenses (including legal and
consulting fees, costs and expenses) incurred by or for the Company in
connection with the development, implementation and operation of the
CAT from June 22, 2020 until such time that the Participants have
completed Full Implementation of CAT NMS Plan Requirements \15\
(``Post-Amendment Expenses''). Section 11.6 establishes target
deadlines for four critical implementation milestones (Periods 1, 2, 3
and 4) \16\ and reduces the amount of fee recovery available to the
Participants if these deadlines are missed.\17\
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    \14\ See Securities Exchange Act Release No. 88890, 85 FR 31322
(May 22, 2020).
    \15\ ``Full Implementation of CAT NMS Plan Requirements'' means
``the point at which the Participants have satisfied all of their
obligations to build and implement the CAT, such that all CAT system
functionality required by Rule 613 and the CAT NMS Plan has been
developed, successfully tested, and fully implemented at the initial
Error Rates specified by Section 6.5(d)(i) or less, including
functionality that efficiently permits the Participants and the
Commission to access all CAT Data required to be stored in the
Central Repository pursuant to Section 6.5(a), including Customer
Account Information, Customer-ID, Customer Identifying Information,
and Allocation Reports, and to analyze the full lifecycle of an
order across the national market system, from order origination
through order execution or order cancellation, including any related
allocation information provided in an Allocation Report. This
Financial Accountability Milestone shall be considered complete as
of the date identified in a Quarterly Progress Report meeting the
requirements of Section 6.6(c).'' See CAT NMS Plan, supra note 1, at
Section 1.1.
    \16\ Id. at Section 11.6(a)(i).
    \17\ Id. at Section 11.6(a)(ii) and (iii).
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    On April 21, 2021, the Nasdaq and Cboe Participants \18\ filed
proposed rule changes to adopt a fee schedule to establish CAT fees
applicable to their Industry Members \19\ in accordance with the
Proposed Funding Model (the ``Industry Member Fee Filings''). In the
Industry Member Fee Filings, the Nasdaq and Cboe Participants stated
that the fee schedule provisions will become operative upon the
Commission's approval of the Proposed Amendment. On June 17, 2021, the
Commission temporarily suspended the Nasdaq and Cboe Participants'
Industry Member Fee Filings and instituted proceedings to determine
whether those filings should be approved or disapproved.\20\
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    \18\ Cboe BYX Exchange, Inc. (``CboeBYX''), Cboe BZX Exchange,
Inc. (``CboeBZX''), Cboe C2 Exchange, Inc. (``C2''), Cboe EDGA
Exchange, Inc. (``Cboe EDGA''), Cboe EDGX Exchange, Inc. (``Cboe
EDGX''), Cboe Exchange, Inc. (``Cboe''), NASDAQ BX, Inc. (``BX''),
Nasdaq GEMX, LLC (``GEMX''), Nasdaq ISE, LLC (``ISE''), Nasdaq MRX,
LLC (``MRX''), NASDAQ PHLX LLC (``Phlx''), The NASDAQ Stock Market
LLC (``Nasdaq'') (collectively, the ``Nasdaq and Cboe
Participants'').
    \19\ See Securities Exchange Act Release Nos. 91750 (May 4,
2021), 86 FR 25045 (May 10, 2021) (SR-BX-2021-018) (``Proposed Fee
Filing Notice''); 91751 (May 4, 2021), 86 FR 24941 (May 10, 2021)
(SR-PHLX-2021-25); 91752 (May 4, 2021), 86 FR 24921 (May 10, 2021)
(SR-NASDAQ-2021-029); 91753 (May 4, 2021), 86 FR 24994 (May 10,
2021) (SR-MRX-2021-05); 91755 (May 4, 2021), 86 FR 25035 (May 10,
2021) (SR-ISE-2021-08); 91756 (May 4, 2021), 86 FR 24979 (May 10,
2021) (SR-GEMX-2021-03); 91757 (May 4, 2021), 86 FR 24911 (May 10,
2021) (SR-C2-2021-008); 91758 (May 4, 2021), 86 FR 25004 (May 10,
2021) (SR-CboeEDGX-2021-024); 91759 (May 4, 2021), 86 FR 24956 (May
10, 2021) (SR-CboeEDGA-2021-010); 91760 (May 4, 2021), 86 FR 24966
(May 10, 2021) (SR-CBOE-2021-030); 91761 (May 4, 2021), 86 FR 25016
(May 10, 2021) (SR-CboeBYX-2021-011); and 91762 (May 4, 2021), 86 FR
24931 (May 10, 2021) (SR-CboeBZX-2021-034).
    \20\ See Securities Exchange Act Release No. 92207 (June 17,
2021), 86 FR 33448 (June 24, 2021).
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III. Summary of Proposal

    Under the Proposed Amendment, the Operating Committee proposes to
revise certain aspects of the funding model set forth in Article XI of
the CAT NMS Plan (the ``Original Funding Model''). The Original Funding
Model uses a bifurcated funding approach in which costs associated with
building and operating the CAT would be borne by (1) Industry Members
(other than ATSs that execute transactions in Eligible Securities \21\
(``Execution Venue ATSs'')) through fixed tiered fees based on message
traffic for Eligible Securities, and (2) Participants and Industry

Members that are Execution Venue ATSs for Eligible Securities through
fixed tiered fees based on market share. The Operating Committee
proposes to amend the CAT NMS Plan to adopt the Proposed Funding Model.
The Proposed Funding Model would continue to require many of the same
elements as the Original Funding Model, including the bifurcated
funding approach, and the use of market share and message traffic.\22\
The Proposed Funding Model, however, would revise the Original Funding
Model in certain ways, including (1) dividing the CAT costs between
Participants and Industry Members, rather than between Execution Venues
and Industry Members (other than Execution Venue ATSs); (2) removing
share volume in OTC Equity Securities from the calculation of market
share for national securities associations; (3) eliminating the use of
tiers in calculating CAT fees for Participants and Industry Members;
(4) removing from the CAT NMS Plan funding principles the requirement
that the fees charged to CAT Reporters with the most CAT-related
activity be generally comparable; (5) eliminating references to fixed
fees for Participants and Industry Members; (6) adopting certain
minimum and maximum CAT fees for Industry Members and Participants; and
(7) imposing certain discounts for market making activity when
calculating Industry Member CAT fees.
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    \21\ The CAT NMS Plan defines ``Eligible Securities'' as
including NMS securities and OTC Equity Securities.'' See CAT NMS
Plan, supra note 1, at Section 1.1.
    \22\ In the description of the Proposed Amendment, the Operating
Committee states that message traffic will be calculated based on
Industry Members' Reportable Events reported to the CAT, as defined
in the CAT Reporting Technical Specifications for Industry Members
(``IM Reporting Tech Specs''), and that Reporting Events in the
current IM Reporting Tech Specs that will be counted as message
traffic include the New Order Event, the Order Route Event and Trade
Event, but will not include reporting activity related to Customer
information as established in the CAT Reporting Customer and Account
Technical Specifications for Industry Members. The Operating
Committee notes that the Reportable Events may vary if the IM
Reporting Tech Specs are amended. See Notice, supra note 4, at
21056-21057.
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    The Operating Committee also proposes to adopt a fee schedule to
establish the CAT fees applicable to Participants based on the Proposed
Funding Model. The Participant Fee Schedule would establish the
allocation percentages and other variables for calculating the CAT fees
under the Proposed Funding Model.

A. Proposed Funding Model

1. Categorization of Alternative Trading Systems
    The Original Funding Model employs a bifurcated approach in which
costs associated with building and operating the CAT would be borne by
(1) Participants and Industry Members that are Execution Venue ATSs for
Eligible Securities through fees based on market share, and (2)
Industry Members (other than Execution Venue ATSs) through fees based
on message traffic. Under the Proposed Funding Model, the concept of an
Execution Venue would be eliminated, and CAT costs would be divided
between Participants as a group and Industry Members as a group;
Execution Venue ATSs would be treated like other Industry Members,
instead of like Participants.\23\ The Operating Committee explains that
this would simplify the Proposed Funding Model by requiring all
Industry Members (instead of Industry Members other than Execution
Venue ATSs) to pay fees based on message traffic and would address any
concerns that treating Execution Venue ATSs as Participants would
create a barrier to entry for smaller ATSs.\24\ Accordingly, under the
Proposed Amendment, the Operating Committee proposes to delete the
definition of the term ``Execution Venue'' and related provisions from
the CAT NMS Plan.\25\
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    \23\ Id. at 21053.
    \24\ Id.
    \25\ Id.
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2. Treatment of OTC Equity Securities
    The Original Funding Model includes reported share volume in OTC
Equity Securities in the calculation of market share for national
securities associations.\26\ The Operating Committee proposes to delete
references to OTC Equity Securities from Section 11.3(a)(i) of the CAT
NMS Plan. Accordingly, under the Proposed Funding Model, the
calculation of market share for national securities associations would
be based solely on the share volume of trades reported in NMS
Stocks.\27\ The Operating Committee explains that the inclusion of OTC
Equity Securities share volume in the calculation of market share would
likely subject FINRA to higher fees since FINRA would be assessed CAT
fees based on market share calculated by share volume, noting that many
OTC Equity Securities are priced below one dollar and transactions in
such OTC Equity Securities tend to involve larger quantities of shares
than transactions in NMS Stocks.\28\
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    \26\ Id. at 21061.
    \27\ Id.
    \28\ See Notice, supra note 4, at 21061.
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3. No Tiered Fees
    The Original Funding Model requires the use of tiered fees for
Industry Members and Participants.\29\ The Operating Committee proposes
to amend Sections 11.1(d), 11.2(c), 11.3(a) and 11.3(b) of the CAT NMS
Plan to eliminate the concept of tiered fees from the CAT NMS Plan.\30\
Accordingly, under the Proposed Funding Model, each Industry Member
would pay a fee based on its percentage of total Industry Member
message traffic (subject to proposed market maker message traffic
discounts,\31\ a minimum fee \32\ and a maximum fee \33\), and each
Participant would pay a fee based on market share.\34\ The Operating
Committee believes that tiered fees require continued reassessment of
changes in message traffic, and that these assessments would be
subjective and overly complex.\35\
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    \29\ Id. at 21055, 21060.
    \30\ Id.
    \31\ See infra Section III.A.7.
    \32\ See infra Section III.A.6.a.
    \33\ Id.
    \34\ See Notice, supra note 4, at 21055, 21060.
    \35\ Id. at 21056. The Operating Committee notes that it is
eliminating tiered fees for Participants for the same reasons it
provided with regard to eliminating tiered fees for Industry
Members. Id.
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4. Elimination of Fee Comparability Requirement From the CAT NMS Plan
Funding Principles
    Section 11.2(c) of the CAT NMS Plan requires the Operating
Committee to establish a fee structure in which the fees charged to CAT
Reporters with the most CAT-related activity (measured by market share
and/or message traffic, as applicable) are generally comparable.
Section 11.2(c) explains that for comparability purposes, the tiered
fee structure takes into consideration affiliations between or among
CAT Reporters. The Operating Committee proposes to remove this
requirement from Section 11.2(c) of the Plan. According to the
Operating Committee, the comparability provision was used to determine
tiers under the Original Funding Model; however, since the Operating
Committee proposes to remove fee tiering from the Proposed Funding
Model,\36\ they believe this provision is no longer relevant.\37\
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    \36\ See supra Section III.A.3.
    \37\ See Notice, supra note 4, at 21056.
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5. No Fixed Fees
    The Operating Committee proposes to amend Sections 11.3(a) and (b)
of the Plan to eliminate references to ``fixed fees'' to be paid by
Industry Members and Participants from the CAT NMS Plan.\38\
Accordingly, under the Proposed Funding Model, the CAT fees to be paid
by Industry Members would

vary in accordance with their message traffic and the CAT fees to be
paid by the Participants would vary in accordance with their market
share.\39\
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    \38\ Id. at 21059, 21062.
    \39\ Id.
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6. Minimum and Maximum Fees
a. Minimum and Maximum Industry Member CAT Fees
    The Operating Committee proposes to amend Section 11.3(b) of the
CAT NMS Plan to provide that each Industry Member would be subject to a
base minimum Industry Member CAT fee (``Minimum Industry Member CAT
Fee'') and a maximum Industry Member CAT fee (``Maximum Industry Member
CAT Fee'').\40\ In the Participants' description of the Proposed
Amendment, the Operating Committee states that the Minimum Industry
Member CAT Fee would be $125 per quarter for an Industry Member whose
CAT fee would be less than $125 per quarter, even if it has not yet
begun to report to the CAT.\41\ If any Industry Member is required to
pay the Minimum Industry Member CAT Fee, the total additional amount
paid by all such Industry Members over the amount they otherwise would
have paid as a result of their message traffic calculation would be
discounted from all Industry Members other than those that were subject
to a Minimum Industry Member CAT Fee in accordance with their message
traffic percentage (``Minimum Industry Member CAT Fee Re-
Allocation'').\42\ The Operating Committee explains that the Minimum
Industry CAT Fee is intended to ensure that all Industry Members
meaningfully contribute to the funding of the CAT.\43\
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    \40\ Id. at 21058.
    \41\ Id.
    \42\ Options Market Makers and Equity Market Makers would be
required to pay the Minimum Industry Member CAT Fee if their
quarterly CAT fee calculated with the market maker discounts is less
than $125 per quarter. Id. at 21058, n.56.
    \43\ See Notice, supra note 4, at 21058-59.
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    The Operating Committee also states that the Maximum Industry
Member CAT Fee would be the fee calculated based on 8% of the total
message traffic for Industry Members.\44\ If an Industry Member's fee
is subject to the Maximum Industry Member CAT Fee, any excess amount
which the Industry Member would have paid as a fee above such Maximum
Industry Member CAT Fee will be re-allocated among all Industry Members
(including any Industry Members subject to the Maximum Industry Member
CAT Fee and any Industry Members subject to the Minimum Industry Member
CAT Fee) in accordance with their percentage of total message traffic
(``Maximum Industry Member CAT Fee Re-Allocation'').\45\ The Operating
Committee explains that the Maximum Industry Member CAT Fee is intended
to act as a cap on fees for certain Industry Members that, based on
message traffic alone, may be subject to ``a significant allocation of
Total CAT Costs.'' \46\
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    \44\ Id. at 21059.
    \45\ Id.
    \46\ Id.
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b. Minimum Participant Fee
    The Operating Committee proposes to amend Section 11.3(a) of the
CAT NMS Plan to impose a minimum fee to be payable by each Participant
(``Minimum Participant Fee'') in addition to fees based on market
share. The Operating Committee explains that this fee would ``ensure
that all Participants provide a meaningful contribution to the funding
of the CAT'' \47\ and facilitate billing and other administrative
functions.\48\
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    \47\ Id. at 21060.
    \48\ Id. at 21059.
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c. Maximum Equities Participant Fee
    The Operating Committee proposes to amend Section 11.3(a)(i) of the
CAT NMS Plan to provide that any Participant that is a national
securities association shall pay a maximum fee established by the
Operating Committee (``Maximum Equities Participant Fee'') instead of
the higher fee calculated based on such Participant's market share. If
a Participant's fee is limited to such maximum fee, any excess amount
which the Participant otherwise would have paid as a fee above such
maximum amount will be re-allocated among all Equities Participants,
including any Equities Participants that are subject to the maximum
fee, in accordance with their market share.\49\ The Operating Committee
explains that FINRA could have a significant allocation of the CAT fees
due to the large volume of NMS Stock activity subject to trade
reporting on FINRA facilities, so the Maximum Equities Participant Fee
would cap the costs allocated to FINRA. In addition, the Operating
Committee states that, as one of the largest regulatory users of CAT,
FINRA should pay a proportionate percentage of the CAT fees
commensurate with its market share, and that market share is a ``fair
and reasonable basis for assessing regulatory usage, expense and burden
among the Participants.'' \50\
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    \49\ See Notice, supra note 4, at 21061.
    \50\ Id. at 21062.
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7. Market Maker Discounts
    The Operating Committee proposes to amend Section 11.3(b) of the
CAT NMS Plan to add market maker message traffic discounts to the
Proposed Funding Model. Under the Original Funding Model, there is no
distinction between the treatment of message traffic for market maker
Industry Members and message traffic for non-market maker Industry
Members for purposes of calculating Industry Member CAT fees. The
Operating Committee explains that the proposed discounts are intended
to address concerns raised previously that treating market maker
message traffic the same as other message traffic for purposes of
calculating Industry Member CAT fees would disproportionately impact
market makers because of their continuous quoting obligations and
result in an undue or inappropriate burden on competition or a
reduction in liquidity and market quality.\51\ The Operating Committee
believes that the proposed discounts would lower CAT fees for market
makers and encourage their provision of liquidity to the market.\52\
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    \51\ Id. at 21057. See also Securities Exchange Act Release No.
81067 (June 30, 2017), 82 FR 31656 (July 7, 2017) (``Suspension of
and Order Instituting Proceedings to Determine Whether to Approve or
Disapprove Proposed Rule Changes to Establish Fees for Industry
Members to Fund the Consolidated Audit Trail'').
    \52\ See Notice, supra note 4, at 21057.
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    In the Participants' description of the Proposed Amendment, the
Operating Committee states that Options Market Maker message traffic
would be discounted based on the trade-to-quote ratio for options when
calculating the message traffic of an Industry Member that is an
Options Market Maker,\53\ and that the trade-to-quote ratio for the
Options Market Maker discount would be calculated each quarter based on
the prior quarter's CAT Data.\54\ The proposed discount would be
calculated by dividing the adjusted trade count \55\ by the total
number of quotes received by the securities information processors
(``SIP'') from an exchange.\56\ Each

Options Market Maker's CAT fee would be calculated by multiplying its
discounted percentage of total Industry Member message traffic during
the relevant time period by the Industry Member Allocation,\57\ subject
to the Minimum Industry Member CAT Fee and the Maximum Industry Member
CAT Fee.\58\
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    \53\ Id. at 21058. The CAT NMS Plan defines ``Options Market
Maker'' as ``a broker-dealer registered with an exchange for the
purpose of making markets in options contracts traded on the
exchange.'' See CAT NMS Plan, supra note 1, at Section 1.1.
    \54\ The CAT NMS Plan defines ``CAT Data'' 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.'' Id.
    \55\ The Proposed Amendment describes the adjusted trade count
as ``the total number of trades for the quarter minus the total
number of trade busts.'' See Notice, supra note 4, at 21058.
    \56\ For each Options Market Maker, the discount would apply to
``(1) all message traffic reported to the CAT by the Options Market
Maker related to an order originated by a market maker in its market
making account for a security in which it is registered . . . and
(2) all message traffic for which a `quote sent time' is reported by
an Options Exchange on behalf of the given Options Market Maker.''
Id.
    \57\ See infra Section III.B.2.
    \58\ See Notice, supra note 4, at 21058.
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    Under the Proposed Funding Model, when calculating the message
traffic of an Industry Member that is an equity market maker in NMS
Stocks (``Equity Market Maker''), its discounted market making message
traffic count would be calculated by multiplying its market making
message traffic in NMS Stocks by the NMS Stock trade-to-quote
ratio.\59\ In the Participants' description of the Proposed Amendment,
the Operating Committee states that the trade-to-quote ratio would be
calculated each quarter based on the prior quarter's CAT Data.\60\ The
proposed discount would be calculated by dividing the adjusted trade
count by the total number of quotes received by the SIP from an
exchange. The Equity Market Maker's CAT fee would be calculated by
multiplying its discounted percentage of total Industry Member message
traffic during the relevant time period by the Industry Member
Allocation,\61\ subject to the Minimum Industry Member CAT Fee and the
Maximum Industry Member CAT Fee.\62\ The discounted message traffic of
Options Market Makers and Equity Market Makers would be counted as part
of total Industry Member message traffic.\63\
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    \59\ Id.
    \60\ Id.
    \61\ See infra Section III.B.2.
    \62\ See Notice, supra note 4, at 21058.
    \63\ Id.
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B. Participant Fee Schedule

1. Total CAT Costs
    Under the Proposed Funding Model, the CAT fees for the relevant
period would be designed to cover the total CAT costs associated with
developing, implementing and operating the CAT for the relevant period
(``Total CAT Costs'').\64\ In the proposed Participant Fee Schedule,
the Operating Committee proposes to define Total CAT Costs as ``the
total budgeted costs for the CAT for the relevant year.'' In addition:
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    \64\ Id. at 21050.

    The total budgeted costs for the CAT for the relevant year shall
be the total CAT costs set forth in the annual operating budget
approved by the Operating Committee pursuant to Section 11.1(a) of
the CAT NMS Plan. The total budgeted costs for the CAT for the
relevant year may be adjusted on a quarterly basis as the Operating
Committee reasonably deems appropriate for the prudent operation of
the Company. To the extent that the Operating Committee adjusts the
total budgeted costs for the CAT for the relevant year during its
quarterly budget review, the adjusted budgeted costs for the CAT
will be used in calculating the remaining CAT fees for that
year.\65\
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    \65\ Id. at 21074.

    The Operating Committee explains that using Total CAT Costs
budgeted for the year, rather than already incurred CAT costs, would
allow the Company to collect fees before bills become payable.\66\ The
Operating Committee notes that, pursuant to Section 11.1(c) of the CAT
NMS Plan, any surpluses collected will be treated as an operational
reserve to offset future fees and will not be distributed to the
Participants as profits.\67\
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    \66\ Id. at 21063.
    \67\ Id.
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2. 75%-25% Allocation Between Industry Members and Participants
    The Proposed Funding Model contemplates allocating CAT costs
between Participants and Industry Members to permit the calculation of
CAT fees based on market share for Participants and based on message
traffic for Industry Members.\68\ The Operating Committee proposes to
implement this allocation through a 75%-25% allocation between Industry
Members and Participants.\69\ The Participant CAT fees that are a part
of the proposed Participant Fee Schedule--Appendix B to the Proposed
Amendment--would apply this allocation to Participants. Participants
would file proposed rule changes to apply this allocation to Industry
Members.\70\ In calculating CAT fees for the relevant period under the
Proposed Funding Model, Industry Members as a group would pay 75% of
the Total CAT Costs for the relevant period (``Industry Member
Allocation'') \71\ and Participants as a group would pay 25% of the
Total CAT Costs for the relevant period (``Participant
Allocation'').\72\
---------------------------------------------------------------------------

    \68\ In the Original Funding Model, costs were allocated between
Execution Venues and certain Industry Members, whereas the Proposed
Funding Model proposes to allocate costs between Participants and
Industry Members.
    \69\ See Notice, supra note 4, at 21054.
    \70\ As of the date of this Order, only the Nasdaq and Cboe
Participants have filed proposed rule changes. See supra note 19.
    \71\ The proposed Participant Fee Schedule states ``[t]he
Industry Member Allocation for each quarter shall be 75% of 1/4th of
the Total CAT Costs for the relevant year.'' See Notice, supra note
4, at 21055. Under the Proposed Funding Model, each Industry Member
would pay a CAT fee calculated by multiplying its message traffic
percentage of total Industry Member message traffic per quarter by
the Industry Member Allocation, subject to the market maker
discounts for message traffic, as applicable, as well as the Minimum
Industry Member CAT Fee and the Maximum Industry Member CAT Fee. Id.
    \72\ Id. at 21054. The proposed Participant Fee Schedule states
``[t]he Participant Allocation for each quarter shall be 25% of 1/
4th of the Total CAT Costs for the relevant year.'' Id. at 21055.
---------------------------------------------------------------------------

    In proposing a 75%-25% allocation between Industry Members and
Participants, the Operating Committee states that it considered a
variety of different potential allocations between Industry Members and
Participants.\73\ For example, the Operating Committee states that it
considered alternatives in which Participants paid larger contributions
than 25% of the total CAT costs (e.g., a 50%-50% allocation between
Industry Members and Participants) and alternatives in which
Participants paid smaller contributions than 25% of the total CAT
costs.\74\ In the scenario where the Participants paid larger
contributions than the 25% allocation, the Operating Committee believed
that this was not fair or equitable to the Participants.\75\ The
Operating Committee came to this conclusion by assessing the number of
Industry Members compared to Participants, noting that ``there are only
25 Participants and approximately 1,237 Industry Members, as of
December 2020'', and analyzing the total revenue, noting that
``Participants only represented approximately 4% of the total CAT
Reporter revenue; Industry Members represented 96% of the total CAT
Reporter revenue.'' \76\ Thus, the Operating Committee determined that
allocating more than 25% of the total CAT costs to the Participants was
not fair and equitable. Similarly, the Operating Committee did not
believe that the revenue based allocation approach would be fair to the
Industry Members because it would impose such a significant percentage
(96%) of CAT costs on Industry Members.\77\ Additionally, the Operating
Committee determined that there would be practical difficulties in
assessing the appropriate revenue figures for all CAT

Reporters. Based upon its analysis, the Operating Committee decided
that alternative approaches based upon revenue were not appropriate and
could potentially have unfair impacts on both the Industry Members and
the Participants.\78\ Ultimately, the Operating Committee believes that
the 75%-25% allocation will create a more equitable fee split because
the Industry Members with the most message traffic and the Participant
complexes with the most market share would pay comparable CAT fees.\79\
The Operating Committee analyzed data from the fourth quarter of 2020,
and determined that the three Industry Members with the most message
traffic and the Participant complexes with the highest CAT fees would
pay annual CAT fees in a similar range of five to six million
dollars.\80\
---------------------------------------------------------------------------

    \73\ Id. at 21054.
    \74\ Id.
    \75\ See Notice, supra note 4, at 21055.
    \76\ Industry Member revenue was calculated based on the total
revenue reported in the Industry Member's FOCUS reports. Participant
revenue was calculated based on revenue information provided in Form
1 amendments and/or publicly reported figures. Participants are not
required to file uniform FOCUS-type reports regarding revenue like
Industry Members. Accordingly, the revenue calculation for
Participants is not as straightforward as for Industry Members. Id.
at 21055, n.31.
    \77\ Id. at 21055.
    \78\ Id.
    \79\ Id.
    \80\ Id.
---------------------------------------------------------------------------

3. Participant CAT Fees
    As described above, the Proposed Funding Model provides that the
Operating Committee shall establish a minimum fee to be payable by each
Participant in addition to a fee based on market share. In the proposed
Participant Fee Schedule, the Operating Committee establishes 0.75% of
the Participant Allocation as the Minimum Participant Fee \81\
regardless of market share.\82\ The total Minimum Participant Fees to
be paid by each Participant would be subtracted from the Participant
Allocation to determine the ``Adjusted Participant Allocation.'' \83\
---------------------------------------------------------------------------

    \81\ See Notice, supra note 4, at 21060.
    \82\ Id.
    \83\ Id.
---------------------------------------------------------------------------

    The proposed Participant Fee Schedule provides that the Equities
Participant Allocation would be 60% of the Adjusted Participant
Allocation and the Options Participant Allocation would be 40% of the
Adjusted Participant Allocation.\84\ The Operating Committee explained
that this allocation was determined through negotiations among the
Participants.\85\
---------------------------------------------------------------------------

    \84\ Id. at 21061. A Participant with both options and equities
market share would be treated as both an Options Participant and an
Equities Participant. Id.
    \85\ Id.
---------------------------------------------------------------------------

    Each Participant would pay a quarterly Participant CAT fee to
recover the costs of the CAT going forward. For Equities Participants,
the quarterly Participant CAT Fee would be calculated by multiplying
the Equities Participant Allocation by each Equities Participant's
percentage of total market share of NMS Stocks for all Equities
Participants for the prior quarter, subject to the Maximum Equities
Participant Fee (if applicable), and in addition to the Minimum
Participant Fee.\86\ For Options Participants, the quarterly
Participant CAT fee would be calculated by multiplying the Options
Participant Allocation by each Options Participant's percentage of
total market share in Listed Options for the prior quarter, in addition
to the Minimum Participant Fee.\87\
---------------------------------------------------------------------------

    \86\ See Notice, supra note 4, at 21061.
    \87\ Id. at 21062.
---------------------------------------------------------------------------

    The quarterly Participant CAT fee would be a quarterly CAT fee
based on market share from the prior quarter and the allocation of
Total CAT Costs under the Proposed Funding Model for the relevant
year.\88\ The Operating Committee proposes a fee schedule to implement
the quarterly Participant CAT fee whereby each Participant would be
assessed a CAT fee, on a quarterly basis, that is 25% of 1/4th of the
total budgeted annual CAT costs for the relevant year, using CAT Data
to calculate market share from the prior quarter of the relevant
year.\89\
---------------------------------------------------------------------------

    \88\ Id. at 21062, 21063.
    \89\ Id. at 21063-21064.
---------------------------------------------------------------------------

    Under the Proposed Funding Model, FINRA, as a national securities
association, would be subject to the Maximum Equities Participant Fee
as set by the Operating Committee. The Operating Committee proposes to
establish in the Participant Fee Schedule a Maximum Equities
Participant Fee equal to the greater of (x) 20% of the Equities
Participant Allocation or (y) the highest CAT fee required to be paid
by any other Equities Participant plus 5% of such highest CAT fee.\90\
Accordingly, as discussed above, FINRA would pay its quarterly
Participant CAT fee based on its market share in NMS Stocks, subject to
the Maximum Equities Participant Fee.
---------------------------------------------------------------------------

    \90\ Id. at 21061.
---------------------------------------------------------------------------

4. Collection of Fees
    The Participants' description of the Proposed Amendment states that
the Operating Committee proposes to establish a system for the
collection of CAT fees pursuant to Section 11.4 of the CAT NMS Plan.
The Company will provide each Participant with an invoice setting forth
the quarterly Participant CAT fee for each payment period. Each
Participant will pay its CAT fees to the Company via the centralized
system for the collection of CAT fees.\91\
---------------------------------------------------------------------------

    \91\ Id. at 21068.
---------------------------------------------------------------------------

IV. Summary of Comments

    The Commission received 19 comment letters on the Proposed
Amendment.\92\ 15 comment letters

object to the Proposed Amendment \93\ and one comment letter supports
the Proposed Amendment.\94\ In addition, the Commission received two
comment letters requesting data from the Operating Committee,\95\ one
comment letter requesting data from the Company,\96\ and one comment
letter from the Operating Committee providing additional details on an
illustrative example in Exhibit B to the Proposed Amendment,\97\ and
two response letters from the Operating Committee.\98\
---------------------------------------------------------------------------

    \92\ See Letters to Vanessa Countryman, Secretary, Commission
from Doug Patterson, Chief Compliance Officer, Cutler Group, LP,
dated June 1, 2021, available at https://www.sec.gov/comments/4-698/4698-8855258-238423.pdf (``Cutler Letter''); Kelvin To, Founder and
President, Data Boiler Technologies, LLC, dated May 3, 2021,
available at https://www.sec.gov/comments/4-698/4698-8749987-237362.pdf (``Data Boiler Letter''); Joanna Mallers, Secretary, FIA
Principal Traders Group, dated May 7, 2021, available at https://www.sec.gov/comments/4-698/4698-8776522-237685.pdf (``FIA PTG May
7th Letter''); Joanna Mallers, Secretary, FIA Principal Traders
Group, dated May 12, 2021, available at https://www.sec.gov/comments/4-698/4698-8793902-237843.pdf (``FIA PTG May 12th
Letter''); Matthew Price, Chief Operations Officer, Fidelity Capital
Markets, dated May 12, 2021, available at https://www.sec.gov/comments/4-698/4698-8791746-237802.pdf (``Fidelity Letter''); Howard
Meyerson, Managing Director, Financial Information Forum, dated
April 29, 2021, available at https://www.sec.gov/comments/4-698/4698-8736502-237163.pdf (``FIF April 29th Letter''); Howard
Meyerson, Managing Director, Financial Information Forum, dated May
21, 2021, available at https://www.sec.gov/comments/4-698/4698-8843662-238307.pdf (``FIF May 21st Letter''); Marcia E. Asquith,
Executive Vice President, Board and External Relations, Financial
Industry Regulatory Authority, Inc., dated May 12, 2021, available
at https://www.sec.gov/comments/4-698/4698-8793900-237824.pdf
(``FINRA Letter''); Andrew Stevens, General Counsel, IMC, dated May
20, 2021, available at https://www.sec.gov/comments/4-698/4698-8819440-238105.pdf (``IMC Letter''); Michael Lewin, Chief Executive
Officer, Istra LLC, dated May 27, 2021, available at https://www.sec.gov/comments/4-698/4698-8847370-238329.pdf (``Istra
Letter''); Gary Goldsholle, Chief Regulatory Officer and General
Counsel, Long-Term Stock Exchange, Inc., dated May 19, 2021,
available at https://www.sec.gov/comments/4-698/4698-8815749-238025.pdf (``LTSE Letter''); Kirsten Wegner, Chief Executive
Officer, Modern Markets Initiative, dated May 6, 2021, available at
https://www.sec.gov/comments/4-698/4698-8771339-237583.pdf (``MMI
Letter''); Michael Blaugrund, Chief Operating Officer, NYSE Inc.,
dated May 10 2021, available at https://www.sec.gov/comments/4-698/4698-8779961-237701.pdf (``NYSE Letter''); William Bartlett, Chief
Executive Officer, Parallax Volatility Advisers, L.P., dated June
28, 2021, available at https://www.sec.gov/comments/4-698/4698-9006549-246006.pdf (``Parallax Letter''); Ellen Greene, Managing
Director, Equity and Options Market Structure, Securities Industry
and Financial Markets Association, dated May 12, 2021, available at
https://www.sec.gov/comments/4-698/4698-8790951-237769.pdf (``SIFMA
Letter''); James Toes, President and Chief Executive Officer, and
Andrew D'Amore, Chairman of the Board, Security Traders Association,
dated June 11, 2021, available at https://www.sec.gov/comments/4-698/4698-8905922-244113.pdf (``STA Letter''); Gunjan Chauhan, Senior
Managing Director, Global Head of SPDR Capital Markets, State Street
Global Advisors, dated May 12, 2021, available at https://www.sec.gov/comments/4-698/4698-8793896-237842.pdf (``SSGA
Letter''); Kevin Donohue, General Counsel, Tower Research Capital
LLC, dated May 12, 2021, available at https://www.sec.gov/comments/4-698/4698-8793895-237841.pdf (``Tower Letter''); and Thomas M.
Merritt, Deputy General Counsel, dated May 12, 2021, available at
https://www.sec.gov/comments/4-698/4698-8790127-237768.pdf (``Virtu
Letter'').
    \93\ See Data Boiler Letter; Fidelity Letter; FIA PTG May 12th
Letter; FINRA Letter; IMC Letter; Istra Letter; LTSE Letter; MMI
Letter; NYSE Letter; SIFMA Letter; SSGA Letter; STA Letter; Tower
Letter; and Virtu Letter.
    \94\ See Cutler Letter (stating ``[h]aving reviewed the
Proposal, and having compared it to the previous CAT funding model,
we see the Amendment as a vast improvement that is more fair and
equitable to both Market Participants and Industry Members. We would
urge that the Commission approve this amendment.''). Id. at 1.
    \95\ See FIF April 29th Letter; FIF May 21st Letter.
    \96\ See FIA PTG May 7th Letter.
    \97\ See Letter to Vanessa Countryman, Secretary, Commission
from Michael Simon, CAT NMS Plan Operating Committee Chair, dated
May 5, 2021, available at https://www.sec.gov/comments/4-698/4698-8760381-237447.pdf (``CAT Operating Committee May 5th Letter'').
    \98\ See Letters to Vanessa Countryman, Secretary, Commission
from Michael Simon, CAT NMS Plan Operating Committee Chair, dated
July 14, 2021, available at https://www.sec.gov/comments/4-698/4698-9061305-246406.pdf (``CAT Operating Committee July 14th Letter I'');
from Michael Simon, CAT NMS Plan Operating Committee Chair, dated
July 14, 2021, available at https://www.sec.gov/comments/4-698/4698-9061306-246406.pdf (``CAT Operating Committee July 14th Letter
II''). CAT Operating Committee July 14th Letter II states, ``these
responses represent the consensus of the Participants, but that all
Participants may not fully agree with each response set forth in
this letter.'' CAT Operating Committee July 14th Letter II at 1-2.
---------------------------------------------------------------------------

Scope of Costs To Be Recovered From Industry Members

    Several commenters question the scope of the CAT costs proposed to
be recovered from Industry Members.\99\ Two commenters state that
Industry Members should only be responsible for the direct costs to
build and operate the CAT, not the Participants' costs of doing
business as SROs, such as insurance and consulting costs.\100\ One
commenter states that the Exchange Act and Rule 613 do not even require
the CAT NMS Plan to impose fees on Industry Members,\101\ and that the
Participants have failed to justify an ``additive CAT fee,'' \102\ and
notes the Participants were exclusively responsible for developing the
CAT and for making decisions about the implementation costs for the
CAT.\103\ Another commenter asks for justification for why Industry
Members should bear the costs of the CAT build when they had no
involvement in the process.\104\
---------------------------------------------------------------------------

    \99\ See SIFMA Letter at 4; Virtu Letter at 5-6; FIA PTG May
12th Letter at 5; Data Boiler Letter at 8; Tower Letter at 3.
    \100\ See SIFMA Letter at 4; FIA PTG May 12th Letter at 5.
    \101\ See Virtu Letter at 2.
    \102\ Id. at 3.
    \103\ Id. at 2.
    \104\ See MMI Letter at 3. Similarly, this commenter also
requests the rationale for why ``a small number of brokers should
pay the vast majority of the now-inflated cost without having any
insight or authority into the methodology and rationale for the
cost?'' Id. at 2. The Operating Committee responds that its proposed
Maximum Industry Member CAT Fee would institute a cap on fees to
fairly allocate costs to Industry Members to avoid certain Industry
Members paying a significant allocation of Total CAT Costs. See CAT
Operating Committee July 14th Letter II at 6-7.
---------------------------------------------------------------------------

    In response to comments objecting to the imposition of CAT costs on
Industry Members,\105\ the Operating Committee states that Industry
Members should be required to pay CAT costs in accordance with Rule 613
and the CAT NMS Plan.\106\ The Operating Committee adds that, because
all market participants would benefit from the enhanced regulatory
oversight provided by the CAT, Industry Members and Participants should
both contribute to covering its costs.\107\
---------------------------------------------------------------------------

    \105\ See Virtu Letter at 2-3; MMI Letter at 3.
    \106\ See CAT Operating Committee July 14th Letter II at 4-5.
    \107\ Id. at 5-6.
---------------------------------------------------------------------------

    Six commenters object to the proposed imposition of historical
costs on Industry Members.\108\ Several commenters note that Industry
Members had no input into or control over the decisions resulting in
the historical costs, including the selection of Thesys Technologies,
LLC as the initial plan processor,\109\ and the subsequent transition
to FINRA as the plan processor.\110\ One commenter states, ``the
Participants must meet a high bar for the Commission to alter course
and support any proposed rule changes that require non-Participants to
pay the Thesys costs.'' \111\ One commenter questions the rationale for
requiring Industry Members to pay 75% of the cost of the transition to
FINRA, explaining that FINRA is completely funded by the industry.\112\
Two commenters object to requiring Industry Members to pay the legal
and consulting fees incurred by Participants prior to the approval of
the CAT NMS Plan.\113\ Two commenters criticize the Proposed Amendment
for requiring new Industry Members to pay CAT fees to recover
historical costs, while exempting new Participants from such a
requirement.\114\
---------------------------------------------------------------------------

    \108\ See SIFMA Letter at 6; Virtu Letter at 5-6; Data Boiler
Letter at 8; Istra Letter at 2-3; Tower Letter at 3; Fidelity Letter
at 3, 5; MMI Letter at 3; Parallax Letter at 1.
    \109\ See SIFMA Letter at 6; Virtu Letter at 5-6; Fidelity
Letter at 3, 5; Tower Letter at 3; MMI Letter at 3.
    \110\ See Virtu Letter at 6.
    \111\ See Parallax Letter at 1.
    \112\ See Virtu Letter at 6.
    \113\ See Tower Letter at 3; SIFMA Letter at 6.
    \114\ See Virtu Letter at 6; SIFMA Letter at 6-7.
---------------------------------------------------------------------------

    In response to comments questioning the scope of the costs to be
recovered from Industry Members,\115\ the Operating Committee states
that the recovery from Industry Members of the historical costs,
Thesys-related costs and third-party expenses (including legal,
consulting and audit expenses) is consistent with the CAT NMS Plan and
the Exchange Act.\116\ The Operating Committee states that, when
approving the CAT NMS Plan, the Commission noted that the Exchange Act
permits the Participants to charge their members fees to fund their
self-regulatory obligations and that the Plan funding model was
designed to impose fees reasonably related to the Participants' self-
regulatory obligations since the fees would be directly associated with
the costs to build and maintain the CAT.\117\ Additionally, the
Operating Committee states that the Commission considered that the
Participants could recover the costs of creating and funding the CAT
central repository in the adopting release for Rule 613.\118\ The
Operating Committee explains that these costs are critical to the
creation, implementation and maintenance of the Plan and therefore
should be within the scope of CAT fees.\119\
---------------------------------------------------------------------------

    \115\ See Data Boiler Letter at 8; FIA PTG May 12th Letter at 2;
Fidelity Letter at 3, 5; Istra Letter at 2-3; MMI Letter at 3; SIFMA
Letter at 6; Tower Letter at 3; Virtu Letter at 5-6.
    \116\ See CAT Operating Committee July 14th Letter I at 5.
    \117\ Id. at 5.
    \118\ Id. at 5-6.
    \119\ Id. at 6.
---------------------------------------------------------------------------

Lack of Industry Member Input

    Several commenters express concern that the proposal was developed
without the involvement of Industry Members.\120\ One commenter states
that it is ``incredulous of the process used to construct a proposed
allocation model in which Industry Members are allocated 75% of the
expenses yet had no meaningful input into the model's development.''
\121\ Another commenter opines that Industry Members are being required
to shoulder most of the costs of the CAT without having had any insight

into the costs.\122\ Two commenters note the lack of representation of
Industry Members on the Operating Committee.\123\ One commenter
believes that the technical expertise of the industry should be
involved in the development of a new cost allocation proposal that
contains ``a full explanation of the proposed operating costs and . . .
an appropriately detailed public disclosure of the operating budget.''
\124\ Another commenter suggests that the Commission ask the
Participants to engage with the industry ``to establish a workable
allocation methodology that is simple, predictable and aligns
responsibility for funding regulatory infrastructure with receiving
economic benefits of the marketplace.'' \125\
---------------------------------------------------------------------------

    \120\ See SIFMA Letter at 2; STA Letter at 2-3; Data Boiler
Letter at 8; FIA PTG May 12th Letter at 2-3; IMC Letter at 2-3;
Fidelity Letter at 2-3, 4; Tower Letter at 7; MMI Letter at 2, 3, 4.
    \121\ See FIA PTG May 12th Letter at 3.
    \122\ See MMI Letter at 2, 3.
    \123\ See Tower Letter at 7; Data Boiler Letter at 6. See also
Parallax Letter at 2 (suggesting the admission of Industry Members
and independent parties as members of the Operating Committee, along
with full internal disclosure of costs, would benefit the operation
of the CAT NMS Plan).
    \124\ See Tower Letter at 7.
    \125\ See NYSE Letter at 5. See also SIFMA Letter at 2 (agreeing
with this statement).
---------------------------------------------------------------------------

    In response to comments noting a lack of industry participation in
the development of the Proposed Funding Model,\126\ the Operating
Committee explains that the CAT Advisory Committee and the public
notice and comment processes afforded by Rule 608 of Regulation NMS
\127\ and Section 19 of the Exchange Act \128\ have provided Industry
Members and other market participants the opportunity to express their
views on the funding model.\129\ With respect to the comments
expressing concern over a lack of Industry Member representation on the
Operating Committee, the Operating Committee states that Industry
Members can provide meaningful input on CAT matters through the current
governance structure without compromising Commission and SRO oversight
of Industry Members.\130\
---------------------------------------------------------------------------

    \126\ See FIA PTG May 12th Letter at 2-3; Fidelity Letter at 2-
4; IMC Letter at 2; SIFMA Letter at 2; STA Letter at 2-3; Tower
Letter at 7.
    \127\ 17 CFR 242.608.
    \128\ 15 U.S.C. 78s.
    \129\ See CAT Operating Committee July 14th Letter I at 7-8.
    \130\ Id. at 8.
---------------------------------------------------------------------------

Participant Conflicts of Interest

    Six commenters believe that the Participants have conflicts of
interest that are reflected in the cost allocation proposed for the
Participants and Industry Members.\131\ Two commenters believe that the
Participants are attempting to further their commercial interests
through the proposal at the expense of their Industry Member
competitors.\132\ One commenter believes that the Participants are
conflicted when determining how much of their own costs they should pay
and suggests greater transparency to expose any Participant
conflicts.\133\ Another commenter states, ``[t]o permit for-profit
exchanges to allocate 75% of the costs of the CAT to Industry Members
furthers the Participants' commercial interests at the expense of the
Industry Members, who have no choice but to pay such fees or else be
subject to regulatory actions by the Participants.'' \134\ This
commenter suggests that the Commission require the Participants to
resubmit a proposal with a transparent analysis and requests that
Industry Members be permitted adequate representation on the Operating
Committee.\135\
---------------------------------------------------------------------------

    \131\ See SIFMA Letter at 2; Virtu Letter at 2, 6; FIA PTG May
12th Letter at 2, 3, 4; Tower Letter at 1, 5, 7; Istra Letter at 2;
MMI Letter at 4. See also Parallax Letter at 3-4 (stating that the
proposed market maker discounts benefit the Participants who have
set the standards for market-making activity, including activity
resulting in message traffic with low order to trade ratios).
    \132\ See SIFMA Letter at 2; Virtu Letter at 2.
    \133\ See FIA PTG May 12th Letter at 3.
    \134\ See Tower Letter at 5.
    \135\ See Tower Letter at 5.
---------------------------------------------------------------------------

    In response to the comments regarding potential conflicts of
interests behind the proposed cost allocation for Participants and
Industry Members,\136\ the Operating Committee states that it disagrees
with the comments and notes that the CAT NMS Plan contains measures to
protect against potential conflicts of interest related to CAT fees,
``including the fee filing requirements under the Exchange Act and
operating the CAT on a break-even basis.'' \137\
---------------------------------------------------------------------------

    \136\ See Data Boiler Letter at 6, 7; FIA PTG May 12th letter at
2, 3; MMI Letter at 4; Parallax Letter at 3-4; Tower Letter at 1, 5,
7.
    \137\ See CAT Operating Committee July 14th Letter I at 8.
---------------------------------------------------------------------------

Lack of Transparency

    Several commenters express concern that the Proposed Funding Model
lacks sufficient transparency into the operating budget as well as the
costs proposed to be recovered by the CAT fees.\138\ One commenter
believes the lack of cost data would make it impossible for the
Commission and Industry Members to determine whether the CAT is
operating efficiently.\139\ The commenter adds that detailed cost
information would be useful for Industry Members to evaluate whether
certain of their activities are causing the CAT to incur higher
operating costs, and consequently causing increases in their own CAT
fees.\140\ This commenter added that it is impossible to evaluate
whether the Proposed Funding Model is consistent with the Exchange Act
due to lack of information; in particular, details concerning sources
of the costs and the operating budget.\141\ Similarly, another
commenter suggests the provision of non-proprietary cost information to
allow meaningful input from Industry Members.\142\ Another commenter
believes that it ``feels like we are being asked to hand over [a] blank
check with the amount to be filled in later.'' \143\ One commenter
states, ``the Amendment is virtually silent on the use of funds and
offers no budget for the CAT's ongoing operation.'' \144\
---------------------------------------------------------------------------

    \138\ See SIFMA Letter at 4-5; Virtu Letter at 4-5; SSGA Letter
at 1-2; Fidelity Letter at 2, 4-5; NYSE Letter at 2; STA Letter at
1, 3-4; Tower Letter at 2, 5, 7; MMI Letter at 2, 3-4; FIA PTG May
12th Letter at 2, 5; IMC Letter at 1, 2; Istra Letter at 1, 2;
Parallax Letter at 1-2, 5.
    \139\ See SIFMA Letter at 5.
    \140\ Id. at 5.
    \141\ Id. at 4.
    \142\ See STA Letter at 3.
    \143\ See Virtu Letter at 4.
    \144\ See NYSE Letter at 2.
---------------------------------------------------------------------------

    Commenters request detailed information on the historical costs and
the operating budget.\145\ One commenter recommends that the Proposed
Amendment disclose its costs and technical requirements, and detail the
historical costs and projected annual budget for the Plan operating
expenses, professional services expenses, and plan processor
expenses.\146\ The commenter recommends that the Participants make the
annual budget public in the future.\147\ Another commenter states that
the Proposed Amendment lacks an explanation for the 2021 estimated cost
of $133 million, including the scale of CAT processing, number of
reported transactions, data storage sizes and processing
performed.\148\ The commenter states that an operating budget is
necessary to determine how much of CAT costs is variable based on
message traffic.\149\ The commenter recommends that the Operating
Committee propose a new cost allocation plan that includes a full
accounting of the historical costs and justification for charging these
costs to Industry Members.\150\ The commenter also recommends that the
new proposal explain its proposed operating costs and

publicly disclose its operating budget.\151\
---------------------------------------------------------------------------

    \145\ Id. at 2; Tower Letter at 2, 7; Istra Letter at 2;
Fidelity Letter at 5; MMI Letter at 2-3, 4; FIA PTG May 12th Letter
at 5; Parallax Letter at 1-2, 5.
    \146\ See NYSE Letter at 2.
    \147\ Id. at 2.
    \148\ See Tower Letter at 2.
    \149\ Id. at 2.
    \150\ Id. at 7.
    \151\ Id. at 7.
---------------------------------------------------------------------------

    Another commenter notes that the Proposed Amendment lacks detail on
the historical CAT assessment costs and requests the Participants to
provide the opportunity to review the costs incurred before the CAT NMS
Plan was approved, noting that Industry Members should be permitted
``to refute the validity of any cost and its allocation to Industry
Members.'' \152\ Another commenter states that the Proposed Amendment
provides no transparency into historical and annual costs.\153\ One
commenter requests the Commission to require the Participants to
provide a cost-sharing structure with greater transparency, including a
full accounting of historical costs and a detailed public explanation
of the proposed operating costs.\154\ The commenter urges greater
transparency in the operating budget, the cost allocation model, and on
variable costs, such as messaging costs, and fixed costs, such as
payroll costs.\155\
---------------------------------------------------------------------------

    \152\ See Fidelity Letter at 5.
    \153\ See FIA PTG May 12th Letter at 5.
    \154\ See MMI Letter at 2-3.
    \155\ Id. at 4.
---------------------------------------------------------------------------

    Commenters also request a breakdown of the estimated CAT costs and
operating budget.\156\ Two commenters request a copy of the 2021
operating budget with quarterly updates including actual and revised
projections.\157\ One of the commenters also requests data to permit
each Industry Member to calculate its fees, including the data used by
the Operating Committee to calculate the estimates in Exhibit B to the
Proposed Amendment.\158\ In a response, the Operating Committee
provides the following data: (1) The budgeted Total CAT Costs for 2021;
(2) total Industry Member message traffic counts, including the total
message counts for Options Market Makers and Equity Market Makers, used
in the proposal's Exhibit B; (3) unrounded trade-to-quote ratios for
Listed Options and NMS Stocks; and (4) the method used to calculate an
Industry Member's quarterly CAT fees.\159\ The Operating Committee
states that Industry Members can contact FINRA CAT to learn which of
the anonymized Industry Member information in Exhibit B represents its
traffic, as well as its total message traffic count and percentage or
number of its reported events that were treated as events of Options
Market Makers or Equity Market Makers.\160\ The Operating Committee
also agrees to provide information to permit an Industry Member to
calculate its actual CAT fees on an ongoing basis.\161\ Subsequently,
the first commenter requests further information to understand the
impact of the funding proposal and help each Industry Member reconcile
the data it received from the Operating Committee and its internal
records.\162\ The second commenter finds the response from the
Operating Committee insufficient and requests a copy of the 2021
operating budget and any quarterly updates and projected costs, a
breakdown of fixed and variable expenses, and provision to Industry
Members of data used to support the selected funding model and the
funding models that were rejected.\163\
---------------------------------------------------------------------------

    \156\ See SSGA Letter at 2; Fidelity Letter at 5; FIF April 29th
Letter at 1, 2; FIA PTG May 7th Letter at 2.
    \157\ See FIF April 29th Letter at 1; FIA PTG May 7th Letter at
2; FIA PTG May 12th Letter at 2.
    \158\ See FIF April 29th Letter at 2. This commenter also
requests that the Operating Committee publicly provide the options
and equity trade-to-quote ratios used in the Proposed Amendment's
Exhibit B and the aggregate number of reportable events of each type
that are counted toward the total number of reportable events. Id.
    \159\ See CAT Operating Committee May 5th Letter. This response
was also noted by the Operating Committee in a response to comments.
See CAT Operating Committee July 14th Letter II at 16.
    \160\ See CAT Operating Committee May 5th Letter at 2.
    \161\ Id. at 2, n.8.
    \162\ See FIF May 21st Letter at 2-3.
    \163\ See FIA PTG May 12th Letter at 2.
---------------------------------------------------------------------------

    Several commenters believe the lack of transparency prevents
Industry Members from estimating their costs and fees.\164\ One
commenter believes that the Proposed Amendment lacks information needed
by Industry Members to calculate their fees as well as to analyze the
fairness and accuracy of the funding model.\165\ The commenter notes
that 75 of 1,237 Industry Members would be allocated 99% of Industry
Member fees, and that the Proposed Amendment claims that this is fair
without factual support.\166\ One commenter acknowledges the data
subsequently provided in the response from the Operating Committee
\167\ and suggests that the Participants regularly provide updated
message traffic data to Industry Members to allow them to estimate
their CAT fees.\168\ Another commenter opines that the supplementary
message traffic data and the 2021 budget information provided by the
Operating Committee is insufficient to allow Industry Members to
project their CAT fees.\169\ One commenter suggests that cost recovery
should have ``transparent inputs'' that would permit Industry Members
to predict their costs and understand the costs of their actions.\170\
---------------------------------------------------------------------------

    \164\ See Tower Letter at 3; SIFMA Letter at 5, 9; Virtu Letter
at 4.
    \165\ See Tower Letter at 3.
    \166\ Id.
    \167\ See CAT Operating Committee May 5th Letter.
    \168\ See SIFMA Letter at 5.
    \169\ See Virtu Letter at 4.
    \170\ See Istra Letter at 2-3.
---------------------------------------------------------------------------

    In response to comments requesting additional transparency into CAT
costs,\171\ the Operating Committee states that it has made publicly
available substantial annual cost data by providing, upon request, its
audited financial statements from the inception of Consolidated Audit
Trail LLC and CAT NMS, LLC through 2020, as required by Section 9.2(a)
of the CAT NMS Plan.\172\ The Operating Committee explains that the
audited financial statements contain the following cost categories:
``technology costs, legal, amortization of developed technology,
consulting, insurance, professional and administration, and public
relations.'' \173\ The Operating Committee also states that the
Proposed Funding Model would provide additional cost transparency
through the provision of the operating budget at the start of each
year, as well as the budgeted Total CAT Costs to be used in calculating
the quarterly CAT fees, and any quarterly budget adjustments.\174\ The
Operating Committee adds that it proposes to provide additional cost
information to the industry through webinars, among other methods,\175\
and notes the cost-related information it provided in its May 5th
letter.\176\
---------------------------------------------------------------------------

    \171\ See FIA PTG May 12th Letter at 2, 5; Fidelity Letter at 3,
5; Istra Letter at 2; MMI Letter at 3, 4; NYSE Letter at 2; Parallax
Letter at 1-2; SIFMA Letter at 4; STA Letter at 3; SSGA Letter at 1-
2; Tower Letter at 2, 4, 7; Virtu Letter at 4.
    \172\ See CAT Operating Committee July 14th Letter I at 4.
    \173\ Id.
    \174\ Id.
    \175\ Id.
    \176\ Id. at 3-4. See also CAT Operating Committee May 5th
Letter.
---------------------------------------------------------------------------

    Several commenters believe the Proposed Amendment does not properly
explain increases in historical and annual costs in excess of prior
estimates.\177\ One commenter states, ``[t]here may well be
appropriate--or at least understandable--reasoning for historical and
ongoing costs to greatly exceed expectations, and that is for the
Participants to explain and the Commission to review as part of its
oversight of the SROs.'' \178\ Two commenters ask if any corresponding
benefits accompany the increased cost

estimates.\179\ One commenter expresses concern that the Participants
have no accountability for the costs of the project.\180\ Another
commenter requests assurances that the CAT will not become an ``ever-
growing expense'' for the industry and investors.\181\ Another
commenter, a proprietary trading firm, states that it ``captures real
time market data feeds from over 100 venues around the world, in a
variety of different products . . . The processing of this historical
market data might reasonably be compared to the kind of processing that
the CAT is expected to do . . . While we do not claim that this is a
perfect comparison, we do posit that the cost to build and maintain the
CAT should be reasonably comparable.'' \182\ The commenter states that
its annual cost for this platform is ten times less than the cost
provided in the Proposed Amendment.\183\
---------------------------------------------------------------------------

    \177\ See FIA PTG May 12th Letter at 4-5; SSGA Letter at 1-2;
Istra Letter at 2; MMI Letter at 1-2, 3-4; Tower Letter at 1, 2-4;
Parallax Letter at 2.
    \178\ See Parallax Letter at 2.
    \179\ See MMI Letter at 2; SSGA Letter at 2.
    \180\ See FIA PTG May 12th Letter at 5.
    \181\ See SSGA Letter at 2.
    \182\ See Tower Letter at 4.
    \183\ Id.
---------------------------------------------------------------------------

    In response to comments questioning the increases in CAT costs from
prior estimates,\184\ the Operating Committee explains that data
processing and storage costs are the primary CAT cost drivers and that
these costs have increased significantly each year.\185\ First, the
Operating Committee states that these costs are directly related to
data volumes reported to the CAT and that the markets have experienced
record high volumes, noting that in 2019 and 2021, data volumes were
five times greater than estimated.\186\ To address the increased
volume, the CAT's storage and computing needs have accordingly
increased.\187\ Second, the Operating Committee explains that the
phased introduction of CAT reporting and functionality results in ``a
substantial increase in message traffic, processing complexity and
storage requirements.'' \188\ Third, the Operating Committee states
that the processing and storage of the many complex reporting scenarios
relating to Industry Member market activity require complicated
algorithms that result in ``significant data processing and storage
costs.'' \189\ Finally, the Operating Committee notes that the
combination of record CAT Data volumes with the stringent performance
timelines and operational requirements applicable to the processing of
CAT Data do not allow much flexibility for cost reductions.\190\
---------------------------------------------------------------------------

    \184\ See FIA PTG May 12th Letter at 4-5; Istra Letter at 2; MMI
Letter at 1-2, 4; Parallax Letter at 1-2; SSGA Letter at 1-2; Tower
Letter at 1-4.
    \185\ See CAT Operating Committee July 14th Letter I at 2.
    \186\ Id.
    \187\ Id.
    \188\ Id. at 3.
    \189\ Id.
    \190\ Id.
---------------------------------------------------------------------------

    Some commenters believe that the Proposed Funding Model lacks the
transparency needed to incentivize the Participants to manage CAT costs
efficiently.\191\ One commenter states the lack of transparency
precludes the Operating Committee's accountability and suggests a full
audit of the CAT's historical costs, ongoing budget and a comparison to
its estimated benefits.\192\ Another commenter believes that allowing
Industry Members greater visibility into CAT's expenses would increase
the Participants' accountability to manage costs.\193\
---------------------------------------------------------------------------

    \191\ See SIFMA Letter at 5; Fidelity Letter at 3, 5; Tower
Letter at 2; FIA PTG May 12th Letter at 5.
    \192\ See Istra Letter at 1.
    \193\ See Fidelity Letter at 5.
---------------------------------------------------------------------------

    In response to comments urging more transparency to ensure the
Participants manage CAT Costs efficiently,\194\ the Operating Committee
states that it ``has a strong focus on cost management and is
significantly incented to keep costs at an appropriate level.'' \195\
The Operating Committee notes that it actively pursues cost saving
measures and has a Cost Management Working Group to address cost
management needs.\196\ Additionally, the Operating Committee states
that the plan processor regularly reviews options to lower compute and
storage needs and works with CAT technology providers to provide
services in a cost-effective manner.\197\
---------------------------------------------------------------------------

    \194\ See FIA PTG May 12th Letter at 5; Fidelity Letter at 3;
Tower Letter at 2, 7.
    \195\ See CAT Operating Committee July 14th Letter I at 4-5.
    \196\ Id. at 5.
    \197\ Id.
---------------------------------------------------------------------------

    Finally, one commenter states that the Proposed Amendment needs to
explain what would happen if actual CAT operating costs exceed the
budget and what would happen if the CAT becomes over-budget. The
commenter believes that a revised amendment should provide further
details on the CAT budget and potential budget surpluses.\198\ In
response to the comment,\199\ the Operating Committee explains that it
would address budget shortfalls or excess fees through updates to the
budgets and operational reserves.\200\ The Operating Committee states
that to recover the costs of CAT on an ongoing basis, it will use the
costs in the annual operating budget as the Total CAT Costs to be used
to calculate CAT fees, and that these budgeted costs may be adjusted on
a quarterly basis to address any changes to the budget.\201\ The
Operating Committee states that if CAT fees exceed the CAT costs,
despite quarterly budget adjustments, any surplus would be treated as
an operational reserve to offset fees in future payments, in accordance
with Section 11.1(c) of the CAT NMS Plan.\202\ If CAT fees are less
than CAT costs, the Operating Committee states that it ``may address
the shortfall by using the operational reserve, including the amount of
the shortfall in future fees and/or seeking to recover the costs via
other measures in accordance with the Exchange Act.'' \203\
---------------------------------------------------------------------------

    \198\ See Fidelity Letter at 3, 5.
    \199\ Id. at 5.
    \200\ See CAT Operating Committee July 14th Letter I at 6.
    \201\ Id. at 6-7.
    \202\ Id. at 7.
    \203\ Id.
---------------------------------------------------------------------------

Allocation of Costs Between Industry Members and Participants

    Many commenters raise concerns about the proposed allocation of
costs between Industry Members and Participants.\204\ Several
commenters argue that the allocation lacks justification for the
decision to recover 75% of Total CAT Costs from Industry Members and
25% from Participants.\205\ Two commenters believe the allocation to
Industry Members is ``arbitrary and unsupportable'' under the Exchange
Act.\206\ One commenter challenges the Participants' justification for
the allocation--that there are more Industry Members than Participants
and Industry Members receive much more revenue than Participants--as
not providing a rational basis on which to claim that the Proposed
Amendment provides for a fair allocation of reasonable fees and does
not impose an undue burden on competition.\207\ Another commenter
states, ``[i]t is unclear from the proposal why the ability to pay is a
corollary to CAT costs and an appropriate factor in justifying the
split.'' \208\ One commenter states that costs are not deemed
reasonable because a party can afford the costs, because the costs are
not large enough to be material, or because the costs can be shared
among thousands of

Industry Members.\209\ Another commenter believes that the cost
allocation should have focused on what market participants should pay
based on costs and benefits, rather than ability to pay based on
aggregate revenues.\210\
---------------------------------------------------------------------------

    \204\ See Fidelity Letter at 2-4; NYSE Letter at 1-2; Tower
Letter at 4-5; MMI Letter at 4-5; Istra Letter at 3; SIFMA Letter at
5-8; Virtu Letter at 3-6; Data Boiler Letter at 7; FIA PTG May 12th
Letter at 3, 4; FINRA Letter at 3, 4-5; Parallax Letter at 2-3.
    \205\ See Fidelity Letter at 3-4; NYSE Letter at 1-2; Tower
Letter at 4-5; MMI Letter at 4-5; Istra Letter at 3; Virtu Letter at
3-4; SIFMA Letter at 5-6.
    \206\ See SIFMA Letter at 5-6; Virtu Letter at 3.
    \207\ See SIFMA Letter at 5-6.
    \208\ See Fidelity Letter at 4.
    \209\ See Parallax Letter at 2.
    \210\ See Virtu Letter at 3-4.
---------------------------------------------------------------------------

    One commenter believes the cost allocation is inequitable and an
undue burden on Industry Members.\211\ The commenter believes that CAT
fees should only be imposed on beneficiaries of CAT services,\212\
allocated in proportion to benefit received.\213\ The commenter
believes that market participants that pose higher risks and potential
conflicts of interest should pay higher fees than other market
participants.\214\
---------------------------------------------------------------------------

    \211\ See Data Boiler Letter at 6, 7.
    \212\ Id. at 6.
    \213\ Id. at 7.
    \214\ Id. at 8.
---------------------------------------------------------------------------

    One commenter approves the proposed elimination of tiering, but
expresses concern at the allocation, stating that allocating set
percentages of total costs to one group over another is the wrong
approach.\215\ The commenter criticizes the Proposed Amendment for
basing the allocation on ensuring that the highest paying Industry
Members pay the same as the highest paying Participants.\216\
Additionally, this commenter believes that Participants would have no
incentive to manage costs if they are only responsible for 25% of Total
CAT Costs.\217\ For the same reason, another commenter believes there
is little incentive for Participants to justify their historical costs
or manage a reasonable and efficient operating budget.\218\ The
commenter believes the cost allocation methodology differences between
the Industry Members and the Participants warrants further discussion
and transparency.\219\
---------------------------------------------------------------------------

    \215\ See FIA PTG May 12th Letter at 4. The Operating Committee
acknowledges the commenter's support of the elimination of tiering.
See CAT Operating Committee July 14th Letter II at 8, 13.
    \216\ See FIA PTG May 12th Letter at 4.
    \217\ Id.
    \218\ See MMI Letter at 4-5.
    \219\ Id. at 5.
---------------------------------------------------------------------------

    One commenter notes that the Proposed Funding Model does not
explain how the 75% allocation to Industry Members relates to overall
CAT costs resulting from Industry Member reporting and therefore may
not be supported by Section 11.2(a) and Section 11.2(b) of the CAT NMS
Plan.\220\ Another commenter suggests a 50%-50% cost allocation between
Industry Members and Participants and argues that any allocation should
be transparent and predictable and supported by evidence.\221\ The
commenter suggests that Industry Member costs be allocated based on the
value any Industry Member receives from the market.\222\ One commenter
believes the proposal lacks information for commenters to understand
how CAT costs are allocated across asset classes.\223\ The commenter
suggests the creation of a predictable cost allocation methodology
reached through engagement with Industry Members that aligns costs with
the receipt of benefits from the market.\224\
---------------------------------------------------------------------------

    \220\ See FINRA Letter at 5. Section 11.2(a) of the CAT NMS Plan
requires the Operating Committee, in establishing the funding of the
Company, to create transparent, predictable revenue streams for the
Company that are aligned with the anticipated costs to build,
operate and administer the CAT and the other costs of the Company.
Section 11.2(b) requires the Operating Committee to establish an
allocation of the Company's related costs among Participants and
Industry Members that is consistent with the Exchange Act, taking
into account the timeline for implementation of the CAT and
distinctions in the securities trading operations of Participants
and Industry Members and their relative impact upon Company
resources and operations.
    \221\ See Istra Letter at 5-6.
    \222\ Id.
    \223\ See NYSE Letter at 4.
    \224\ Id. at 5.
---------------------------------------------------------------------------

    One commenter believes the proposed allocation is arbitrary because
the Participants override the allocation with adjusted allocations,
such as the proposed market maker discounts, the Minimum Industry
Member CAT Fee and the Maximum Industry Member CAT Fee, and the
treatment of OTC Equity Security share volume.\225\ The commenter
believes the Proposed Funding Model would shift the regulatory cost of
overseeing one Industry Member to another Industry Member, with the
potential effect of retail investors who transact with small Industry
Members indirectly subsidizing sophisticated investors who transact
with large market-makers.\226\ The commenter states, ``the Operating
Committee has not provided a sufficient regulatory case for a proposed
funding model which imposes different costs for the same CAT reportable
events.'' \227\
---------------------------------------------------------------------------

    \225\ See Parallax Letter at 3.
    \226\ Id.
    \227\ Id.
---------------------------------------------------------------------------

    Several commenters believe the proposed cost allocation between
Industry Members and Participants ignores the time investment and costs
already incurred by Industry Members to report to the CAT.\228\ One
commenter notes that Industry Members have had to develop internal
systems for CAT reporting and that Industry Members have provided
critical assistance to the Participants in developing Industry Member
CAT Technical Specifications.\229\ The commenter opines that an
analysis of the costs incurred by Industry Members for internal
compliance would demonstrate that the Industry Allocation is not an
equitable allocation of reasonable fees.\230\ Another commenter notes
that the Proposed Amendment does not mention the substantial time and
cost invested by Industry Members into refining reporting
specifications and building CAT reporting platforms,\231\ and one other
commenter believes that the Proposed Amendment ignores the substantial
costs that Industry Members have incurred associated with the
development, testing and implementation of the CAT.\232\
---------------------------------------------------------------------------

    \228\ See SIFMA Letter at 7-8; FIA PTG May 12th Letter at 5;
Tower Letter at 4-5. See also Fidelity Letter at 2 (stating that
Industry Members have spent much time and money on building systems
to comply with CAT requirements but will not be reimbursed for these
costs).
    \229\ See SIFMA Letter at 7-8. See also STA Letter at 3
(describing collaborative efforts by Industry Members and
Participants to develop technical specifications).
    \230\ See SIFMA Letter at 7-8.
    \231\ See Tower Letter at 4-5.
    \232\ See FIA PTG May 12th Letter at 5.
---------------------------------------------------------------------------

    One commenter states that the Proposed Funding Model treats
affiliated Participants differently than affiliated Industry Members
without explaining how this inconsistency is consistent with the
Exchange Act.\233\ The commenter explains that affiliated Participants
would be charged based on aggregate market share as a single complex,
while affiliated Industry Members would be charged individually based
on individual message traffic. The commenter states, ``[t]his
methodology seems to be rooted in the Participants' view that it
provides for a fair allocation of fees under the proposal because it
results in the largest Participant complexes being charged
approximately the same level of fees as the largest Industry Members.''
The commenter notes that the result is not a fair allocation of
reasonable fees as the largest Industry Members have multiple
affiliates that, if viewed as a single aggregated complex like
affiliated Participants, would pay greater CAT fees than the largest
Participant complexes.\234\
---------------------------------------------------------------------------

    \233\ See SIFMA Letter at 8.
    \234\ Id.
---------------------------------------------------------------------------

    One commenter questions why equities and options message traffic is
combined for Industry Member cost allocation purposes, unlike the
Participant Allocation where 60% of the Total CAT Costs would be
allocated to

Equities Participants and 40% would be allocated to Options
Participants.\235\ The commenter states, ``[i]f message traffic is
indeed the major driver of CAT costs, then it stands to reason that at
least 40% of the Industry Member costs be allocated to options (as in
the Participants' allocation framework), if not significantly more.''
\236\
---------------------------------------------------------------------------

    \235\ See Istra Letter at 3-4.
    \236\ Id. at 4.
---------------------------------------------------------------------------

    Four commenters note that, under the proposed allocation, Industry
Members must not only cover their allocation of the Total CAT Costs,
but they must also fund FINRA, which would owe its own share of
Participant CAT fees.\237\ One commenter believes that, including
FINRA's allocation, the Industry Member Allocation would exceed
80%.\238\ The commenter notes that the Proposed Amendment does not
explain why FINRA should be treated the same way as exchanges for
allocation purposes when Industry Members pay FINRA's operation costs
through regulatory fees and fines.\239\ Another commenter believes that
FINRA will raise its fees to help pay for its own Participant
Allocation, further increasing the cost to be borne by Industry
Members.\240\ This commenter suggests that the Participants should
submit a new proposal with a cost methodology supported by data that
Industry Members can evaluate.\241\ FINRA itself comments, ``[o]ne
effect of adopting these unsupported allocation criteria would be an
unjustified increase in FINRA's fee assessments . . .'' \242\ FINRA
also states that because it relies on regulatory fees from members, the
Proposed Funding Model would reallocate FINRA's costs to Industry
Members in addition to the CAT fees to be borne by Industry
Members.\243\
---------------------------------------------------------------------------

    \237\ See Virtu Letter at 4, 6; Fidelity Letter at 4; SIFMA
Letter at 7; Tower Letter at 5.
    \238\ See SIFMA Letter at 7.
    \239\ Id.
    \240\ See Fidelity Letter at 4.
    \241\ Id.
    \242\ See FINRA Letter at 9.
    \243\ Id.
---------------------------------------------------------------------------

    In response to comments questioning the justification for the
proposed 75%-25% allocation,\244\ the Operating Committee states that
this allocation ``continues to be an equitable allocation of reasonable
CAT fees between Industry Members and Participants that balances the
costs paid by each CAT Reporter and the regulatory benefits each
receives.'' \245\ The Operating Committee reiterates the arguments it
made in support of the allocation from the Proposed Amendment.\246\
---------------------------------------------------------------------------

    \244\ See Data Boiler Letter at 7; FIA PTG May 12th Letter at 4;
Fidelity Letter at 2-4; FINRA Letter at 5; Istra Letter at 3; MMI
Letter at 4; NYSE Letter at 2; Parallax Letter at 2; SIFMA Letter at
5-8; STA Letter at 4; Tower Letter at 4; Virtu Letter at 3-4.
    \245\ See CAT Operating Committee July 14th Letter II at 2.
    \246\ Id. at 2-4; Notice, supra note 4 at 21054-21055.
---------------------------------------------------------------------------

    Several commenters state that the Proposed Amendment does not
consider whether regulatory fees and fines paid by Industry Members
could offset the costs of CAT.\247\ One commenter asserts that the
Proposed Funding Model did not consider using exchange regulatory
revenues or profits as sources of funding and did not explain why fines
paid by Industry Members for CAT reporting violations could not offset
the costs of operating the CAT.\248\ In addition, the commenter states
that the Proposed Funding Model did not analyze whether FINRA's Trading
Activity Fee (``TAF'') could offset the costs of CAT when OATS is
retired, or whether FINRA could reduce the TAF rate.\249\ The commenter
said that inclusion of this analysis would reveal that the Industry
Allocation is not an equitable allocation of reasonable fees.\250\
Another commenter argues that Industry Members pay membership fees,
registration and licensing fees, and regulatory fees to Participants,
yet the Proposed Funding Model did not address how these fees are
allocated and why Industry Members must be responsible for a new
funding requirement.\251\ One commenter believes that revenues from
fines should be allocated to the Company's operating reserve in order
to decrease CAT costs.\252\
---------------------------------------------------------------------------

    \247\ See Tower Letter at 5; SIFMA Letter at 7; Virtu Letter at
3; FIA PTG May 12th Letter at 5; Parallax Letter at 4. See also Data
Boiler Letter at 7 (suggesting that fines and settlements should
fund the CAT).
    \248\ See SIFMA Letter at 7. See also MMI Letter at 5-6 (stating
that information is needed concerning any potential cost-savings to
FINRA from OATS retirement that could offset the cost of running the
CAT, as well as a proposed TAF increase in 2022); Virtu Letter at 4
(stating that the Proposed Amendment should have analyzed whether
FINRA's TAF could offset CAT costs after OATS has been retired).
    \249\ See SIFMA Letter at 7.
    \250\ Id.
    \251\ See Virtu Letter at 3.
    \252\ See FIA PTG May 12th Letter at 5.
---------------------------------------------------------------------------

    In response to comments suggesting that regulatory fines and cost
savings due to the retirement of OATS should be used to decrease CAT
costs,\253\ the Operating Committee states that it will not reduce CAT
fees based on the ancillary effects of the CAT.\254\ The Operating
Committee explains that the proposed CAT fees account for the costs to
create, implement and maintain the CAT, not other aspects of the
Participants' regulatory operations.\255\
---------------------------------------------------------------------------

    \253\ Id.; MMI Letter at 5-6; SIFMA Letter at 7; Tower Letter at
5; Virtu Letter at 4.
    \254\ See CAT Operating Committee July 14th Letter I at 6.
    \255\ Id.
---------------------------------------------------------------------------

    Finally, one commenter argues that the elimination of comparability
as a funding principle removes support for the proposed cost
allocation.\256\ The commenter explains that comparability was key to
the decision to propose the 75%-25% allocation to Industry Members and
Participants when the Participants previously proposed CAT fees in
2017.\257\ The commenter explains that the Participants removed
comparability from the funding model because the Proposed Funding Model
no longer assesses fees through tiers.\258\ The commenter states, ``if
the principle driving the change to a no-tier approach is to assess
fees more transparently on CAT Reporters in direct relation to the
costs that each creates for the CAT with its reporting activity, the
Proposed Funding Model fails to apply this principle consistently.''
\259\ The commenter adds that the Proposed Amendment does not discuss
the impact of the removal of the tiers and the comparability principle
on the funding model.\260\
---------------------------------------------------------------------------

    \256\ See FINRA Letter at 2-4.
    \257\ On May 9, 2017, the Operating Committee for the Company
filed proposed Amendment No. 2 to the CAT NMS Plan to establish the
CAT fees to be paid by the Participants. See Letter from Michael
Simon, CAT NMS Plan Operating Committee Chair, to Brent J. Fields,
Secretary, Commission, dated May 9, 2017. See also Securities
Exchange Act Release No. 80930 (June 14, 2017), 82 FR 28180 (June
20, 2017). The Commission issued an order of summary abrogation of
Amendment No. 2 on July 21, 2017. See Securities Exchange Act
Release No. 81189 (July 21, 2017), 82 FR 35005 (July 27, 2017). The
Participants subsequently filed proposed Amendment No. 3 to the CAT
NMS Plan on October 30, 2017 to establish the Participant CAT fees.
See Letter from Michael Simon, CAT NMS Plan Operating Committee
Chair, to Brent J. Fields, Secretary, Commission, dated October 30,
2017. On December 11, 2017, the Operating Committee filed proposed
Amendment No. 4 to the CAT NMS Plan, which replaced and superseded
Amendment No. 3 in its entirety. See Letter from Michael Simon, CAT
NMS Plan Operating Committee Chair, to Brent J. Fields, Secretary,
Commission, dated December 11, 2017. See also Securities Exchange
Act Release No. 82451 (January 5, 2018), 83 FR 1399 (January 11,
2018). The Participants withdrew Amendment No. 4 to the CAT NMS Plan
on January 11, 2018. See Letter from Michael Simon, CAT NMS Plan
Operating Committee Chair, to Brent J. Fields, Secretary,
Commission, dated January 10, 2018. See also Securities Exchange Act
Release No. 82892 (March 16, 2018), 83 FR 12633 (March 22, 2018).
    \258\ See FINRA Letter at 4.
    \259\ Id.
    \260\ Id. at 7, n.17.
---------------------------------------------------------------------------

    In response to the comment,\261\ the Operating Committee explains
that the comparability provision was used to determine fee tiers. Since
a tiered fee

structure would not be used under the Proposed Funding Model, the
Operating Committee believes it is appropriate to delete the
comparability provision as it is no longer relevant.\262\
---------------------------------------------------------------------------

    \261\ Id. at 2-4.
    \262\ See CAT Operating Committee July 14th Letter II at 4.
---------------------------------------------------------------------------

Allocation of Costs Between Equities and Options Participants

    Two commenters argue that the Proposed Amendment failed to justify
the proposed 60%-40% allocation of costs between Equities and Options
Participants.\263\ Both commenters believe the Proposed Amendment lacks
justification to support the allocation.\264\ One commenter notes that
the Participants previously stated that message traffic is a key cost
driver of the CAT.\265\ The commenter attests that the Proposed Funding
Model would assess Options Participants, which generate significantly
more message traffic than Equities Participants, a lesser amount of the
total CAT costs than Equities Participants.\266\ This commenter
believes the result is inconsistent with the CAT's cost alignment
principles \267\ and that the Operating Committee does not explain how
the result is consistent with the funding principles or the Exchange
Act.\268\ The other commenter believes the allocation is arbitrary and
unfairly discriminatory.\269\ The commenter opines that the explanation
provided by the Participants--that the allocation was ``subject to
negotiations among the Participants''--is not a basis for approval
under the Exchange Act, and notes that the majority of votes on the
Operating Committee are held by Participants that operate options
exchanges.\270\
---------------------------------------------------------------------------

    \263\ See LTSE Letter at 5; FINRA Letter at 6. See also NYSE
Letter at 2 (describing the proposed allocation as part of ``an
incomprehensible, distorted program''); MMI Letter at 5 (requesting
further transparency and discussion on cost allocation methodology
differences between Participants and Industry Members).
    \264\ See LTSE Letter at 5; FINRA Letter at 6.
    \265\ See FINRA Letter at 6.
    \266\ Id.
    \267\ See Section 11.2(a) and Section 11.2(b) of the CAT NMS
Plan.
    \268\ See FINRA Letter at 6.
    \269\ See LTSE Letter at 5.
    \270\ Id.
---------------------------------------------------------------------------

    In response to the comments,\271\ the Operating Committee states
that the proposed 60%-40% allocation of costs between Equities
Participants and Options Participants is an appropriate allocation that
is consistent with the CAT NMS Plan, which contemplates allocating
Participant CAT fees based on activity in options and equities, and
explains that the allocation was the subject of negotiations among the
Participants.\272\
---------------------------------------------------------------------------

    \271\ See FINRA Letter at 6; LTSE Letter at 5; MMI Letter at 5;
NYSE Letter at 2.
    \272\ See CAT Operating Committee July 14th Letter II at 13-14.
---------------------------------------------------------------------------

Use of Message Traffic for Industry Members

    Several commenters object to the use of message traffic as the
basis of Industry Member CAT fees.\273\ One commenter believes that
message traffic is not an appropriate measure for allocating fees to
Industry Members.\274\ The commenter notes that the Participants
``control how message traffic is defined, how message traffic is
processed, and whether steps can be taken to reduce message traffic.''
\275\ The commenter argues that charging only Industry Members based on
message traffic is not a fair allocation of reasonable fees because it
creates no incentive for the Participants to control CAT message
traffic and CAT costs.\276\ The commenter believes the proliferation of
exchanges has resulted in higher CAT message traffic, and thus higher
costs, but notes that this is not analyzed in the funding model.\277\
Another commenter suggests that additional data is needed to support
the apportionment of CAT costs according to message count.\278\
---------------------------------------------------------------------------

    \273\ See SIFMA Letter at 8-10; Istra Letter at 3, 5; Virtu
Letter at 5; SSGA Letter at 2; Data Boiler Letter at 7. See also
NYSE Letter at 1, 3 (recommending a cost allocation framework based
on executed share volume) and STA Letter at 4 (agreeing with the
suggestion to use executed share volume); Fidelity Letter at 4
(stating that the Proposed Amendment has not explained why Industry
Members must pay CAT fees based on message traffic while
Participants will pay based on market share).
    \274\ See SIFMA Letter at 8-9.
    \275\ Id. at 9.
    \276\ Id.
    \277\ Id.
    \278\ See MMI Letter at 4.
---------------------------------------------------------------------------

    One commenter notes that the elimination of comparability as a
funding principle removes support for the proposed requirement to base
Industry Members CAT fees on message traffic and Participant CAT fees
on market share.\279\ The commenter explains that comparability was key
to the decision to propose message traffic as the basis of Industry
Member CAT fees and market share as the basis of Execution Venue CAT
fees when the Participants previously proposed CAT fees in 2017.\280\
---------------------------------------------------------------------------

    \279\ See FINRA Letter at 3-4.
    \280\ See supra note 257.
---------------------------------------------------------------------------

    Two commenters believe that the Proposed Funding Model needs to
examine the impact of options quoting activity on CAT.\281\ One
commenter states that Options Market Maker quoting comprises the ``vast
majority'' of CAT messaging and that the design of the CAT should be
reevaluated in case CAT is being ``weighed down by options activity
with little impact on market quality and traded volume.'' \282\ The
other commenter states that the Proposed Funding Model lacks an
analysis of the message traffic and costs generated by Options Market
Makers that are required by SRO rules to provide quotes in over a
million options series, even those that do not trade.\283\
---------------------------------------------------------------------------

    \281\ See Istra Letter at 2; SIFMA Letter at 9.
    \282\ See Istra Letter at 2.
    \283\ See SIFMA Letter at 9.
---------------------------------------------------------------------------

    In response to comments questioning the use of message traffic as a
basis of Industry Member CAT fees,\284\ the Operating Committee states
that ``the use of message traffic for allocating CAT costs among
Industry Members is consistent with the CAT NMS Plan as approved by the
Commission, and the proposal did not seek to change the use of message
traffic for this purpose in the Proposed Funding Model.'' \285\ The
Operating Committee notes that it explored allocating the Industry
Member Allocation based on revenue related to activities in Eligible
Securities, but decided it would be difficult to determine the types of
Industry Member revenue to include in the calculation of a CAT fee
using this approach.\286\
---------------------------------------------------------------------------

    \284\ See Istra Letter at 4-5; MMI Letter at 4; SIFMA Letter at
8-9.
    \285\ See CAT Operating Committee July 14th Letter II at 6.
    \286\ Id.
---------------------------------------------------------------------------

    One commenter suggests that the Reportable Events that will
constitute message traffic be defined in the CAT NMS Plan, rather than
in the IM Reporting Tech Specs, so that any changes to the Reportable
Events that would be defined as message traffic would be subject to the
notice and comment process.\287\ In response to the comment,\288\ the
Operating Committee states that ``delineating the method for reporting
Reportable Events used in the message traffic count in the Technical
Specifications, rather than the CAT NMS Plan, is appropriate because
the technical approach to reporting specific Reportable Events may vary
over time.'' \289\
---------------------------------------------------------------------------

    \287\ See Fidelity Letter at 2, 3.
    \288\ Id.
    \289\ See CAT Operating Committee July 14th Letter II at 6.
---------------------------------------------------------------------------

    Commenters also believe that the use of message traffic as a basis
of Industry Member CAT fees could affect market participant behavior
with harmful consequences to the markets.\290\ Two

commenters believe the Participants have not analyzed the impact of the
proposed approach on the markets.\291\ One commenter states that the
Proposed Funding Model does not address whether market makers would
reduce their quoting activity in order to reduce their CAT fees, even
with the proposed market maker discounts.\292\ The other commenter
believes that such a reduction in message traffic could impact
liquidity.\293\
---------------------------------------------------------------------------

    \290\ See SIFMA Letter at 9; Virtu Letter at 5; Istra Letter at
5; SSGA Letter at 2.
    \291\ See SIFMA Letter at 9; Virtu Letter at 5.
    \292\ See SIFMA Letter at 9.
    \293\ See Virtu Letter at 5.
---------------------------------------------------------------------------

    One commenter believes that using message traffic as the basis of
Industry Member CAT fees will hurt the provision of liquidity and harm
market quality.\294\ The commenter explains, ``[a] message that becomes
displayed on an exchange has obvious value to the entire market and not
only to the broker (or its customer) providing that liquidity. Taxing
the message will naturally discourage its provision.'' \295\ The
commenter emphasizes the benefits of displayed quoting on the markets
and the negative consequences of the potential reduction in this
activity that could result from the proposed approach.\296\
---------------------------------------------------------------------------

    \294\ See Istra Letter at 5.
    \295\ Id.
    \296\ Id.
---------------------------------------------------------------------------

    One commenter discusses the potential negative impact on ETFs
caused by the use of message traffic as the basis for Industry Member
CAT fees.\297\ The commenter believes that the proposed approach would
result in a reduction in quoting to minimize CAT fees.\298\ The
commenter states that ETF market making activity is message-intensive
and any changes in behavior caused by the proposed approach could
``interfere with the arbitrage mechanism and negate the work by
Industry Members and exchanges to promote tighter bid-ask spreads,
deeper markets and greater participation among liquidity providers.''
\299\
---------------------------------------------------------------------------

    \297\ See SSGA Letter at 2.
    \298\ Id.
    \299\ Id.
---------------------------------------------------------------------------

    In response to comments questioning the effects of the use of
message traffic to calculate fees on the markets,\300\ the Operating
Committee states that its proposed market maker discounts and the
proposed Maximum Industry Member CAT Fee are designed to address
potential disincentives. Additionally, the Operating Committee states
that the market maker discounts ``recognize the value of the market
making activity to the market as a whole.'' \301\
---------------------------------------------------------------------------

    \300\ See Istra Letter at -5; MMI Letter at 4; SIFMA Letter at
9; SSGA Letter at 2; Tower Letter at 1; Virtu Letter at 5.
    \301\ See CAT Operating Committee July 14th Letter II at 7.
---------------------------------------------------------------------------

Use of Market Share for Participants

    Several commenters believe that Participants should be assessed
fees based on message traffic rather than market share.\302\ The
commenters note that the primary driver of CAT costs is the processing
and storage of message traffic; therefore, Participants should be
assessed CAT fees based on message traffic.\303\
---------------------------------------------------------------------------

    \302\ See FIA PTG May 12th Letter at 3; LTSE Letter at 2-3;
FINRA Letter at 6-7, 9.
    \303\ See FIA PTG May 12th Letter at 3; LTSE Letter at 2; FINRA
Letter at 6-7, 9.
---------------------------------------------------------------------------

    One commenter believes that using market share to determine
Participant CAT fees ``gives a free pass to Plan Participants who
generate high levels of message traffic but have very little market
share.'' \304\ This commenter believes that using message traffic as
the basis of Industry Member CAT fees and market share as the basis of
Participant CAT fees is inherently discriminatory, maximizes Industry
Member costs and minimizes Participant costs, and appears to result
from Participant conflicts of interest and a lack of industry input
until the funding model.\305\ Another commenter believes that using
message traffic as the basis of Industry Member CAT fees and market
share as the basis of Participant CAT fees is discriminatory and
unsupportable.\306\ One commenter believes the Proposed Amendment fails
to explain why Industry Members will be assessed fees based on message
traffic while Participants will be assessed fees based on market
share.\307\ Two commenters believe that the Participants will have no
incentives to limit message traffic to lower costs if they are not
being charged CAT fees based on message traffic.\308\
---------------------------------------------------------------------------

    \304\ See FIA PTG May 12th Letter at 3. See also SIFMA Letter at
9 (stating that message traffic is a key driver of CAT costs and
that the Participants generate a significant amount of message
traffic, yet the Participants propose to base their own CAT fees on
market share). See also Parallax Letter at 3 (recommending an
analysis of the amount of message traffic that is driven by the
Participants, such as market maker quoting).
    \305\ See FIA PTG May 12th Letter at 3.
    \306\ See IMC Letter at 2.
    \307\ See Fidelity Letter at 4. See also LTSE Letter at 2-3
(stating that the Participants have provided no metrics to support
their rationale that message traffic is not an appropriate basis for
Participant CAT fees because their message traffic is derivative of
quotes and orders received from Industry Members that the
Participants are required to display) and NYSE Letter at 2 (stating
that the Proposed Amendment does not justify why some costs should
be split by message traffic and other costs should be split by
market share).
    \308\ See Virtu Letter at 5; LTSE Letter at 3.
---------------------------------------------------------------------------

    Another commenter, FINRA, believes that requiring market share to
be the basis of Participant costs is inconsistent with CAT cost
alignment principles \309\ because message traffic is the key driver of
costs, not market share.\310\ The commenter notes that if the
Participants believe FINRA's CAT fee would be too low based on its
message traffic, FINRA would consider paying a more appropriate amount
or an allocation based on a combination of message traffic and market
share.\311\
---------------------------------------------------------------------------

    \309\ See supra note 267.
    \310\ See FINRA Letter at 6.
    \311\ Id. at 9.
---------------------------------------------------------------------------

    This commenter also objects to the use of market share in
determining its CAT fees.\312\ The commenter states that it would be
responsible for 20% of the Equities Participant Allocation even though
it generates less than 1% of equities message traffic reported to the
CAT.\313\ The commenter explains that its market share would be based
on trade reporting volume reported through its facilities, which is
also reported by Industry Members.\314\ The commenter asks how this is
consistent with the Operating Committee's rationale for the use of
market share to determine Participant CAT fees--that message traffic is
not an appropriate basis for Participants because their message traffic
is derivative of Industry Member reporting activity.\315\ In addition,
the commenter states that the Operating Committee justifies the use of
market share for Participants because their business models are focused
on executions; however, the commenter notes that ``given FINRA's unique
role, trade volume is reported through FINRA for regulatory purposes,
not to serve FINRA's business purposes.'' \316\ The commenter adds that
the Operating Committee justifies the use of market share as a basis
for FINRA's CAT fees as FINRA would be one of the largest regulatory
users of the CAT.\317\ The commenter asks ``why regulatory usage is
offered only to justify FINRA's allocation of the proposed fee that is
based on unrelated criteria (market share), particularly when all
Participants may use CAT data for regulatory purposes.'' \318\ The
commenter argues that the Operating Committee has not analyzed the
costs of regulatory usage, and states that if a

regulatory usage fee is appropriate, it should apply to all
Participants.\319\
---------------------------------------------------------------------------

    \312\ Id. at 7-9.
    \313\ Id. at 8.
    \314\ Id. at 7.
    \315\ Id. at 7.
    \316\ See FINRA Letter at 7-8.
    \317\ Id. at 8.
    \318\ Id.
    \319\ Id. at 8-9.
---------------------------------------------------------------------------

    In response to comments questioning the use of market share to
calculate Participant fees,\320\ the Operating Committee states that
the CAT NMS Plan contemplates that Participants pay a CAT fee that is
based on market share. After considering alternatives to the use of
market share, the Operating Committee concluded that market share would
equitably allocate CAT fees among Participants. The Operating Committee
reiterates arguments it made in support of the use of market share in
the Proposed Amendment.\321\
---------------------------------------------------------------------------

    \320\ See FIA PTG May 12th Letter at 3; Fidelity Letter at 4;
FINRA Letter at 6-7; IMC Letter at 2; LTSE Letter at 2-3; MMI Letter
at 5; NYSE Letter at 2; SIFMA Letter at 8-9.
    \321\ See CAT Operating Committee July 14th Letter II at 12-13;
Notice, supra note 4, at 21060.
---------------------------------------------------------------------------

Maximum Equities Participant Fee

    Two commenters object to the Maximum Equities Participant Fee
because they believe that the sole Participant subject to the fee--
FINRA--would be unfairly afforded preferential treatment.\322\ One
commenter believes that FINRA should receive a higher portion of CAT
costs than Participants that lack a surveillance business because FINRA
can capitalize off of the predecessor plan processor's development work
and its technology will benefit from CAT.\323\ The commenter believes
that FINRA should not be permitted re-allocation of its CAT fee under
the Maximum Equities Participant Fee.\324\ The commenter also states,
``[a]lthough we acknowledge that the nature of OTC trading in penny
level may inherently be different from the proposed message traffic
measurement use in Equity/Listed Option Group Split, similar arguments
may apply to thinly traded securities, ESG stocks, etc., which SEC rule
should avoid `craft-out.''' \325\
---------------------------------------------------------------------------

    \322\ See Data Boiler Letter at 8-9; LTSE Letter at 5. See also
NYSE Letter at 2 (noting the added complexity of the ``bespoke fee
structure for FINRA'').
    \323\ See Data Boiler Letter at 8-9.
    \324\ Id. at 9.
    \325\ Id. at 8.
---------------------------------------------------------------------------

    In response to the comment noting the nature of trading in OTC
Equity Securities,\326\ the Operating Committee states that it proposes
to exclude OTC Equity Securities share volume from the calculation of
market share for national securities exchanges. The Operating Committee
reiterates the arguments it made in support of the proposed exclusion
of OTC Equity Securities share volume in the Proposed Amendment.\327\
---------------------------------------------------------------------------

    \326\ Id.
    \327\ See CAT Operating Committee July 14th Letter II at 14;
Notice, supra note 4, at 21061.
---------------------------------------------------------------------------

    The other commenter believes that the Maximum Equities Participant
Fee market share caps and re-allocation are arbitrary and unfairly
discriminatory.\328\ The commenter believes that the proposal lacks
justification for requiring other Equities Participants to be allocated
FINRA's market share when FINRA's activity does not occur on their
markets.\329\ The commenter notes, ``[t]he stated rationale that this
is necessary for the FINRA fees to be `fair and reasonable' is
subjective, unsupported by any data, and further highlights the
shortcomings of a fee model based on market share.'' \330\
---------------------------------------------------------------------------

    \328\ See LTSE Letter at 5.
    \329\ Id.
    \330\ Id.
---------------------------------------------------------------------------

    One commenter, FINRA, also objects to the Maximum Equities
Participant Fee because it is based on the use of market share for
calculating FINRA's CAT fees, which FINRA believes is inconsistent with
the funding principles of the CAT NMS Plan and ill-suited to FINRA's
unique model.\331\
---------------------------------------------------------------------------

    \331\ See supra text accompanying notes 312-319.
---------------------------------------------------------------------------

    In response to comments received on the Maximum Equities
Participant Fee,\332\ the Operating Committee reiterates the arguments
it made in support of the proposed Maximum Equities Participant Fee in
the Proposed Amendment.\333\
---------------------------------------------------------------------------

    \332\ See Data Boiler Letter at 9; FINRA Letter at 7-9; LTSE
Letter at 5; NYSE Letter at 2.
    \333\ See CAT Operating Committee July 14th Letter II at 15;
Notice, supra note 4, at 21062.
---------------------------------------------------------------------------

Minimum Participant Fee

    One commenter objects to the proposed Minimum Participant Fee as
inconsistent with the notion that market share is a fair method of
allocation,\334\ and as arbitrary and unfairly discriminatory.\335\ The
commenter states that this fee would be paid by every Participant,
regardless of its market share, and notes that this fee can
significantly increase even if a Participant itself is not creating
increased costs to the CAT.\336\ The commenter questions why some
Participants would incur a higher Minimum Participant Fee when only
certain Participants engage in activity that results in increased CAT
message traffic.\337\ The commenter also notes that a Participant that
operates both an options and equities exchange would be assessed only
one Minimum Participant Fee.\338\
---------------------------------------------------------------------------

    \334\ See LTSE Letter at 4.
    \335\ See LTSE Letter at 4. See also NYSE Letter at 2 (noting
the added complexity of the Minimum Participant Fee).
    \336\ See LTSE Letter at 4.
    \337\ Id. at 4-5.
    \338\ Id. at 4, n.9.
---------------------------------------------------------------------------

    In response to the comments on the Minimum Participant Fee,\339\
the Operating Committee reiterates the arguments it made in support of
the proposed Minimum Participant Fee in the Proposed Amendment.\340\
---------------------------------------------------------------------------

    \339\ Id. at 4-5; NYSE Letter at 2.
    \340\ See CAT Operating Committee July 14th Letter II at 15;
Notice, supra note 4, at 21060.
---------------------------------------------------------------------------

Maximum Industry Member CAT Fee

    Several commenters express concern about the Maximum Industry
Member CAT Fee.\341\ One commenter believes the Maximum Industry Member
CAT Fee ``exacerbates inequalities'' \342\ and believes that small
firms should not be responsible for subsidizing the CAT fees for the
top 36 firms that generate the vast majority of message traffic.\343\
Similarly, another commenter believes that a lack of transparency into
the re-allocation of CAT fees for Industry Members in excess of the
Maximum Industry Member CAT Fee adds complexity and makes it difficult
for Industry Members to calculate their costs under the Proposed
Funding Model.\344\ This commenter also believes the cap of 8% of total
Industry Member CAT message traffic is arbitrary.\345\
---------------------------------------------------------------------------

    \341\ See Data Boiler Letter at 7-8; Tower Letter at 6; FINRA
Letter at 5-6; MMI Letter at 5; SIFMA Letter at 9.
    \342\ See Data Boiler Letter at 7.
    \343\ Id.
    \344\ See SIFMA Letter at 9.
    \345\ Id.
---------------------------------------------------------------------------

    Another commenter objects to the 8% cap, explaining that the
proposal has not fully justified the cap, and that it provides large
brokers an unfair advantage by requiring other Industry Members,
including their direct competitors, to pay the large brokers' re-
allocation of fees in excess of the Maximum Industry Member CAT
Fee.\346\ Finally, one commenter believes the Proposed Funding Model
insufficiently analyzes the ``cross-subsidization that results from the
proposed minimum and maximum Industry Member fees'' nor does it explain
the reasoning behind the creation of the Maximum Industry Member CAT
Fee.\347\
---------------------------------------------------------------------------

    \346\ See Tower Letter at 6.
    \347\ See FINRA Letter at 5.
---------------------------------------------------------------------------

    In response to comments on the Maximum Industry Member CAT
Fee,\348\ the Operating Committee reiterates the arguments it made in
support of the proposed Maximum

Industry CAT Fee in the Proposed Amendment.\349\
---------------------------------------------------------------------------

    \348\ See Data Boiler Letter at 7-8; FINRA Letter at 5-6; MMI
Letter at 5; SIFMA Letter at 9; Tower Letter at 6.
    \349\ See CAT Operating Committee July 14th Letter II at 12;
Notice, supra note 4, at 21059.
---------------------------------------------------------------------------

Minimum Industry Member CAT Fee

    Two commenters object to the Minimum Industry Member CAT Fee.\350\
One of the commenters believes the Minimum Industry Member CAT Fee
poses an undue burden on Industry Members and, by charging a ``de