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[Federal Register Volume 89, Number 226 (Friday, November 22, 2024)]
[Notices]
[Pages 92726-92729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27352]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101648; 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 Regarding Reporting 
of Certain Verbal Activity, Floor and Upstairs Activity

November 18, 2024.

I. Introduction

    On August 2, 2024, the Consolidated Audit Trail, LLC (``CAT LLC''), 
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., Investors Exchange LLC, Long-Term Stock 
Exchange, Inc., MEMX, LLC, Miami International Securities Exchange 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'')) 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 to the CAT NMS Plan to amend 
existing requirements for the consolidated audit trail (``CAT'') 
regarding the reporting of certain verbal activity, floor and upstairs 
activity (the ``Verbal Quotes Amendment'').\4\ Notice of the Verbal 
Quotes Amendment was published in the Federal Register on August 20, 
2024.\5\
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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 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016). The 
full text of the CAT NMS Plan is available at www.catnmsplan.com. 
Unless otherwise defined herein, capitalized terms used herein are 
defined as set forth in the CAT NMS Plan.
    \2\ 15 U.S.C 78k-1(a)(3).
    \3\ 17 CFR 242.608.
    \4\ See Letter from Brandon Becker, CAT NMS Plan Operating 
Committee Chair, to Vanessa Countryman, Secretary, Commission, dated 
August 2, 2024.
    \5\ See Securities Exchange Act Release No. 100727 (Aug. 14, 
2024), 89 FR 67499 (Aug. 20, 2024) (the ``Notice'').
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    This order institutes proceedings, under Rule 608(b)(2)(i) of 
Regulation NMS,\6\ to determine whether to disapprove the Verbal Quotes 
Amendment or to approve the Verbal Quotes Amendment with any changes or 
subject to any conditions the Commission deems necessary or 
appropriate.
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    \6\ 17 CFR 242.608(b)(2)(i).
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II. Background

    Rule 613(j)(9) of Regulation NMS and Section 1.1 of the CAT NMS 
Plan define the term ``reportable event'' as including, but not limited 
to, the original receipt or origination, modification, cancellation, 
routing, and execution (in whole or in part) of an order, and receipt 
of a routed order.\7\ The term ``order'' is defined in Rule 613(j)(8) 
of Regulation NMS and Section 1.1 of the CAT NMS Plan as including: (i) 
any order received by a member of a national securities exchange or 
national securities association from any person; (ii) any order 
originated by a member of a national securities exchange or national 
securities association; or (iii) any bid or offer.\8\ ``Bid'' and 
``offer'' are defined in Rule 600(b)(16) of Regulation NMS as the bid 
price or offer price communicated by a member of an exchange or 
association to any broker-dealer or to any customer, at which it is 
willing to buy or sell one or more round lots of an NMS security, as 
principal or agent, but excluding indications of interest.\9\
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    \7\ 17 CFR 242.613(j)(9).
    \8\ 17 CFR 242.613(j)(9).
    \9\ 17 CFR 242.600(b)(8).
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    Rule 613 and the CAT NMS Plan both require that the Industry 
Members and the Participants capture and report quotes and orders that 
meet the definition of a CAT reportable event, with no exclusion for 
verbal quotes and orders.\10\ The Commission previously

[[Page 92727]]

granted CAT LLC's request for temporary exemptive relief until July 31, 
2026 \11\ for the reporting to CAT of the following activities: (i) 
``floor broker verbal announcements of firm orders on an exchange that 
are otherwise reported as systematized orders; (ii) market maker verbal 
announcements of firm quotes on an exchange trading floor; (iii) 
telephone discussions between an Industry Member and a client that may 
involve firm bid and offer communications; and (iv) unstructured 
electronic and verbal communications that are not currently captured by 
Industry Member order management or execution systems (e.g., Bloomberg 
chats, text messages).'' \12\
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    \10\ Unstructured verbal or manual communications on exchange 
floors and ``upstairs'' are reportable events under Rule 613 and the 
CAT NMS Plan because firm verbal quotes and orders, whether they 
occur on an exchange floor or ``upstairs,'' are reportable to CAT if 
they are a firm bid or offer. See Securities Exchange Act Release 
No. 90405 (Nov. 12, 2020), 85 FR 73544, at 73546-547 (Nov. 18, 2020) 
(``November 2020 Exemptive Order'').
    \11\ See November 2020 Exemptive Order (granting the requested 
relief until July 31, 2023); Securities Exchange Act Release No. 
98023 (July 28, 2023), 88 FR 51369 (Aug. 3, 2023) (the ``July 2023 
Exemptive Order'') (extending the relief until July 31, 2026).
    \12\ See Notice, 89 FR at 67499.
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III. Summary of the Verbal Quotes Amendment

    CAT LLC proposes to amend the CAT NMS Plan to state that the 
activities subject to the July 2023 Exemptive Order (the ``Exempt 
Activities'') shall not be reportable as Participant Data or Recorded 
Industry Member Data that Participants and Industry Members, as 
applicable, must record and report to the Central Repository.\13\ 
Specifically, proposed new Section 6.3(g) of the CAT NMS Plan would 
state the following:
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    \13\ See Notice, 89 FR at 67499.
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    ``Notwithstanding any other provision of SEC Rule 613 or the CAT 
NMS Plan, the following categories of data shall not be reportable to 
the Central Repository under Section 6.3(d):

    (i) floor broker verbal announcements of firm orders on an 
exchange that are otherwise reported as systematized orders;
    (ii) market maker verbal announcements of firm quotes on an 
exchange trading floor;
    (iii) telephone discussions between an Industry Member and a 
client that may involve firm bid and offer communications; and
    (iv) unstructured electronic and verbal communications that are 
not currently captured by Industry Member order management or 
execution systems (e.g., electronic chats, text messages).'' \14\
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    \14\ See id. at 67501. CAT LLC states that the term ``client'' 
in the Verbal Quotes Amendment is intended to include both a non-
Industry Member customer of the Industry Member or another Industry 
Member. Id. In addition, CAT LLC proposes to add references to new 
Section 6.3(g) to Section 6.3(d) and Section 6.4(d)(i) of the CAT 
NMS Plan. Specifically, CAT LLC proposes to add the parenthetical 
phrase ``(subject to the exclusions outlined in Section 6.3(g))'' to 
Section 6.3(d) and Section 6.4(d)(i) of the CAT NMS Plan. Id.

    CAT LLC states that the Verbal Quotes Amendment is intended to have 
an effect similar to permanent incorporation into the CAT NMS Plan of 
the existing Commission-approved temporary exemptive relief within the 
July 2023 Exemptive Order, without the added conditions to relief.\15\ 
CAT LLC states that the Verbal Quotes Amendment is not intended to 
affect activity that is currently reported to CAT or to otherwise 
modify the categories in the July 2023 Exemptive Order.\16\
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    \15\ Id. The July 2023 Exemptive Order conditioned relief on the 
Participants providing the Commission a written status update on the 
reporting of these quotes and orders by July 31, 2025, including, 
for both verbal activity on exchange floors and upstairs activity 
separately, an analysis of the feasibility of traders 
contemporaneously recording firm bid and offer information for 
verbal and manual quotes and orders, and an implementation plan for 
the reporting of these quotes and orders. July 2023 Exemptive Order, 
88 FR at 51370-71.
    \16\ See Notice, 89 FR at 67501.
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    CAT LLC states that the Verbal Quotes Amendment is merited because 
of the impact on overall CAT costs of requiring reporting of the Exempt 
Activities.\17\ CAT LLC estimates that these costs could be in the 
billions.\18\ CAT LLC further states that the Verbal Quotes Amendment 
is appropriate because it is technologically infeasible to reliably, 
accurately, and consistently collect and report data concerning the 
Exempt Activities.\19\
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    \17\ See id.
    \18\ See id. A letter cited by CAT LLC provides additional 
detail on these estimates. See Letter from Howard Meyerson, Managing 
Director, Financial Information Forum, to Commission at 20 (Dec. 16, 
2022) (``December 2022 FIF Letter'').
    \19\ Id.
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    CAT LLC also states that no technological developments have 
occurred that would make reporting the Exempt Activities cost-
effective.\20\ CAT LLC states that market participants continue to work 
on developing this technology, but that a number of Industry Members 
have conducted internal analyses on this question and concluded that 
there is currently no artificial intelligence software or algorithm 
with a feasible architecture to accurately capture and report the 
Exempt Activities to the CAT in an automated manner.\21\ CAT LLC states 
that, given that the technology has not developed in the four years 
since the original November 2020 Exemptive Order, it is ``exceedingly 
unlikely'' that it will develop to a usable point over the next two 
years.\22\ Moreover, because there is no existing technological 
solution, CAT LLC states that reporting the Exempt Activities would 
require substantial human intervention, which would also add 
significantly to the costs.\23\ Specifically, CAT LLC states that the 
only way for the Participants and Industry Members to report the Exempt 
Activities to the CAT would be to manually capture these events by 
requiring a human being to listen to every verbal interaction of every 
floor broker, market maker, or upstairs trader either live or from 
tape, and/or to sift through electronic communications to determine if 
and precisely when a quote was given and whether it was firm.\24\ CAT 
LLC states that there also would be considerable costs to implement the 
reporting of the Exempt Activities beyond the above-described costs to 
maintain such reporting.\25\ CAT LLC further states that reporting the 
Exempt Activities would also disrupt trading and reduce the use of firm 
quotations and orders.\26\
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    \20\ See Notice at 67502-03.
    \21\ See id. (citing December 2022 FIF Letter at 5).
    \22\ See Notice at 67502.
    \23\ See Notice at 67502-03.
    \24\ Id.
    \25\ Id.
    \26\ See Notice at 67503.
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    CAT LLC states that these significant costs ``would not provide 
enough value from a regulatory and surveillance perspective to outweigh 
their substantial costs'' because most of the relevant data that could 
be gleaned from the Exempt Activities is already gathered in some other 
form in CAT.\27\ CAT LLC states that on all exchanges with floor 
trading, every order must be systematized upon receipt by the floor 
broker on the floor of the exchange and is reportable to the CAT.\28\ 
CAT LLC states that an order is ``systematized'' when (A) the order is 
sent electronically to the floor broker's system at the exchange; or 
(B) the order is manually systematized by the floor broker upon receipt 
outside of the floor broker's system and prior to representation in the 
floor trading crowd.\29\ CAT LLC states that therefore all firm bids or 
offers represented by a floor broker must be associated with orders 
that have already been systematized.\30\ CAT LLC states that because 
the Participants require that any firm verbal interest expressed by a 
floor broker must be related to a CAT reportable systematized order, 
and any resulting trade must be reported to CAT, all verbal interest 
expressed by a floor broker that may be a CAT Reportable Event is 
already reported to CAT.\31\ In addition, CAT LLC states that any 
cancellation or change to an order transmitted to an exchange floor 
broker must occur within

[[Page 92728]]

the systematized order record.\32\ CAT LLC states that there is 
additional information that would be associated with the Exempt 
Activities, but states that such additional information does not need 
to be captured to allow for effective surveillance and regulation of 
exchange floor activity.\33\
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    \27\ Id.
    \28\ Id.
    \29\ See Notice at 67503.
    \30\ Id.
    \31\ See Notice at 67502-03.
    \32\ Id.
    \33\ See id.
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    CAT LLC states therefore that the ultimate regulatory value-add of 
expanding the existing CAT reporting to include the Exempt Activities 
is minimal given the scope of the data associated with the Exempt 
Activities that is already reported.\34\ CAT LLC further states that 
communications related to the Exempt Activities do not lend themselves 
to the types of market manipulation considered in the adoption of Rule 
613 because such communications are not widely disseminated.\35\ CAT 
LLC concludes that any small incremental value added for regulatory 
purposes would be significantly outweighed by costs imposed on Industry 
Members, their customers, and the Participants, as well as the 
disruption to trading on Participant trading floors.\36\
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    \34\ See id.
    \35\ See id.
    \36\ Id.
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IV. Summary of Comments

    The Commission received one comment letter in connection with the 
Verbal Quotes Amendment.\37\ The commenter supports the Verbal Quotes 
Amendment stating that: (i) automated capture of the Exempt Activities 
is not possible based on current technology; (ii) the costs for 
manually capturing, interpreting and reporting the Exempt Activities 
will be significant; \38\ (iii) the CAT NMS Plan and the Commission's 
approval order do not address these significant costs; (iv) Industry 
Members will curtail their current verbal activity in the absence of 
relief, which could result in reduced execution quality for customer 
orders and reduced market liquidity; (v) prices communicated in 
upstairs one-to-one unstructured communications are not firm because 
they are not binding on the communicating party and always require a 
further affirmative action by the communicating party; (vi) that the 
regulatory value of the data is not clear; and (vii) the Exemptive 
Activities could be defined as ``pre-order communications,'' but are 
not orders under Commission Rule 613 because they cannot result in a 
trade execution unless an order is transmitted and received subsequent 
to such a pre-order communication and prior to the time of trade 
execution'' \39\
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    \37\ See Letter from Howard Meyerson, Managing Director, 
Financial Information Forum (``FIF'') to Secretary, Commission, 
dated September 9, 2024, available at https://www.sec.gov/comments/4-698/4698-518035-1490942.pdf (``September 2024 FIF Letter''), 
enclosing December 2022 FIF Letter.
    \38\ FIF states that the annual cost to report the Exempt 
Activities would be in excess of $4.4 billion, subject to an 
increase for inflation in the period of time following the 
submission of the December 2022 FIF Letter. September 2024 FIF 
Letter at 3.
    \39\ September 2024 FIF Letter at 2-4.
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    FIF states that if the Commission does not provide permanent relief 
for reporting the Exempt Activities, it would be necessary for the 
Commission to: (i) provide support for this position based on 
Commission precedent; \40\ (ii) publicly communicate its reasoning in 
writing; (iii) clearly explain the conditions under which specific 
verbal activity would be or would not be reportable to CAT; and (iv) 
ensure that the CAT system and CAT documentation are updated to clearly 
describe the required reporting (including how specific fields, such as 
duration, should be reported).\41\ FIF states that the Commission would 
need to complete these four steps at least three years prior to any 
implementation of CAT reporting for the Exempt Activities.\42\
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    \40\ FIF states that unstructured verbal and electronic upstairs 
activities are not reportable to CAT under Rule 613 because they 
represent indications of interest--not orders. December 2022 FIF 
Letter at 11-12. CAT LLC states that the analysis in the December 
2022 FIF Letter explaining why unstructured verbal and electronic 
upstairs activities are not reportable to CAT under Rule 613 
(including the challenges that would be associated with reporting 
those activities) applies equally to communications on exchange 
trading floors. See Notice, supra note 5, at 67499.
    \41\ September 2024 FIF Letter at 4.
    \42\ Id.
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V. Proceedings To Determine Whether To Approve or Disapprove the Verbal 
Quotes Amendment and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Rule 
608(b)(2)(i) of Regulation NMS,\43\ and Rules 700 and 701 of the 
Commission's Rules of Practice,\44\ to determine whether to disapprove 
the Verbal Quotes Amendment or to approve the Verbal Quotes Amendment 
with any changes or subject to any conditions the Commission deems 
necessary or appropriate. The Commission is instituting proceedings to 
have sufficient time to consider the issues raised by the proposal, 
including comments received. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comment 
on the Verbal Quotes Amendment.
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    \43\ 17 CFR 242.608(b)(2)(i).
    \44\ 17 CFR 201.700; 17 CFR 201.701.
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    Rule 608(b)(2) of Regulation NMS provides that the Commission 
``shall approve a national market system plan or proposed amendment to 
an effective national market system plan, with such changes or subject 
to such conditions as the Commission may deem necessary or appropriate, 
if it finds that such plan or amendment is necessary or appropriate in 
the public interest, for the protection of investors and the 
maintenance of fair and orderly markets, to remove impediments to, and 
perfect the mechanisms of, a national market system, or otherwise in 
furtherance of the purposes of the [Exchange] Act.'' \45\ Rule 
608(b)(2) further provides that the Commission shall disapprove a 
national market system plan or proposed amendment if it does not make 
such a finding.\46\ In the Notice, the Commission sought comment on the 
proposed amendment, including whether the proposed amendment is 
consistent with the Exchange Act.\47\ In this order, pursuant to Rule 
608(b)(2)(i) of Regulation NMS,\48\ the Commission is providing notice 
of the grounds for disapproval under consideration:
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    \45\ 17 CFR 242.608(b)(2).
    \46\ Id.
    \47\ See Notice at 67504.
    \48\ 17 CFR 242.608(b)(2)(i).
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     whether, consistent with Rule 608 of Regulation NMS, the 
Participants have demonstrated that the Verbal Quotes Amendment is 
necessary or appropriate in the public interest, for the protection of 
investors and the maintenance of fair and orderly markets, to remove 
impediments to, and perfect the mechanisms of, a national market 
system, or otherwise in furtherance of the purposes of the Exchange 
Act; \49\ and
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    \49\ 17 CFR 242.608(b)(2).
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     whether, and if so how, the Verbal Quotes Amendment would 
affect efficiency, competition or capital formation.
    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a NMS plan filing is consistent with the Exchange Act 
and the rules and regulations issued thereunder . . . is on the plan 
participants that filed the NMS plan filing.'' \50\ The description of 
the NMS plan filing, its purpose and operation, its effect, and a legal 
analysis of its consistency with applicable requirements must all be 
sufficiently

[[Page 92729]]

detailed and specific to support an affirmative Commission finding, and 
``[a] mere assertion that the NMS plan filing is consistent with those 
requirements is not sufficient.'' \51\ Any failure of the plan 
participants that filed the NMS plan filing to provide such detail and 
specificity may result in the Commission not having a sufficient basis 
to make an affirmative finding that the NMS plan filing is consistent 
with the Act and the applicable rules and regulations thereunder.\52\
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    \50\ 17 CFR 201.701(b)(3)(ii).
    \51\ Id.
    \52\ Id.
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VI. Commission's Solicitation of Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Verbal Quotes Amendment. In particular, the Commission invites 
the written views of interested persons concerning whether the Verbal 
Quotes Amendment is consistent with the Exchange Act, the rules and 
regulations thereunder, or any other provisions of the CAT NMS Plan. 
The Commission asks that commenters address the sufficiency and merit 
of the Participants' statements in support of the Verbal Quotes 
Amendment, and to consider the impact of the Verbal Quotes Amendment on 
efficiency, competition, and capital formation, in addition to any 
other comments they may wish to submit about the Verbal Quotes 
Amendment.
    Although there do not appear to be any issues relevant to approval 
or disapproval that would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 608(b)(2)(i) of Regulation NMS, any request for an opportunity to 
make an oral presentation.
    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Verbal Quotes Amendment should be 
approved or disapproved by December 13, 2024. Any person who wishes to 
file a rebuttal to any other person's submission must file that 
rebuttal by December 27, 2024. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number 4-698 on the subject line.

Paper Comments

     Send paper comments in triplicate to: Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number 4-698 (CAT Verbal Quotes 
Amendment). This file number should be included on the subject line if 
email is used. To help the Commission process and review your comments 
more efficiently, please use only one method. The Commission will post 
all comments on the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the Verbal Quotes Amendment that 
are filed with the Commission, and all written communications relating 
to the Verbal Quotes Amendment between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for website 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street NE, Washington, DC 20549 on official business days between the 
hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be 
available for inspection and copying at the Participants' principal 
offices. Do not include personal identifiable information in 
submissions; you should submit only information that you wish to make 
available publicly. We may redact in part or withhold entirely from 
publication submitted material that is obscene or subject to copyright 
protection. All submissions should refer to File Number 4-698 (CAT 
Verbal Quotes Amendment) and should be submitted on or before December 
13, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
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    \53\ 17 CFR 200.30-3(a)(85).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-27352 Filed 11-21-24; 8:45 am]
BILLING CODE 8011-01-P
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