Document ID: SEC-2023-0823-0001
Agency: sec
Document Type: Notice
Title: Order Granting a Temporary Conditional Exemption: Participants from the National Market System Plan Governing the Consolidated Audit Trail
Posted Date: 2023-08-03T04:00Z

[Federal Register Volume 88, Number 148 (Thursday, August 3, 2023)]
[Notices]
[Pages 51369-51371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-16518]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98023]

Order Granting a Temporary Conditional Exemption Pursuant to 
Section 36(a)(1) of the Securities Exchange Act of 1934 and Rule 608(e) 
of Regulation NMS Under the Exchange Act, Relating to the Reporting of 
Certain Activities on the Floor of National Securities Exchanges and 
Certain Activities by Industry Members Off Exchange Floors, as Required 
by Section 6.4(d) of the National Market System Plan Governing the 
Consolidated Audit Trail

I. Introduction

    By letter dated March 31, 2023, 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, 
LLC, 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'' or ``SROs'') requested that 
the Securities and Exchange Commission (``Commission'') grant temporary 
conditional exemptive relief to the Participants from the National 
Market System Plan Governing the Consolidated Audit Trail (``CAT NMS 
Plan''),\1\ pursuant to its authority under section 36(a)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'') \2\ and Rule 608(e) 
of Regulation NMS under the Exchange Act, from certain reporting 
requirements in section 6.4(d) of the CAT NMS Plan relating to certain 
activities on the floors of national securities exchanges and certain 
activities by Industry Members off exchange floors (``upstairs 
activity'').\3\
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    \1\ The CAT NMS Plan was approved by the Commission, as 
modified, on November 15, 2016. See Securities Exchange Act Release 
No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016) 
(``CAT NMS Plan Approval Order'').
    \2\ 15 U.S.C. 78mm(a)(1).
    \3\ See letter from the Participants to Vanessa Countryman, 
Secretary, Commission, dated March 31, 2023 (the ``March 31, 2023 
Exemption Request''). Unless otherwise noted, capitalized terms are 
used as defined in the CAT NMS Plan. ``Upstairs'' is a term used to 
describe the off-exchange market. For example, trading that occurs 
within a broker-dealer firm or between two broker-dealers in the 
over-the-counter market would be described as occurring 
``upstairs.''
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    Section 36(a)(1) of the Exchange Act grants the Commission the 
authority, with certain limitations, to ``conditionally or 
unconditionally exempt any person, security, or transaction . . . from 
any provision or provisions of [the Exchange Act] or of any rule or 
regulation thereunder, to the extent that such exemption is necessary 
or appropriate in the public interest, and is consistent with the 
protection of investors.'' \4\ Under Rule 608(e) of Regulation NMS, the 
Commission may ``exempt from [Rule 608], either unconditionally or on 
specified terms and conditions, any self-regulatory organization, 
member thereof, or specified security, if the Commission determines 
that such exemption is consistent with the public interest, the 
protection of investors, the maintenance of fair and orderly markets 
and the removal of impediments to, and perfection of the mechanism of, 
a national market system.'' \5\
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    \4\ 15 U.S.C. 78mm(a)(1).
    \5\ 17 CFR 242.608(e).
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    For the reasons set forth below, the Commission believes that it is 
consistent with the purposes of the Exchange Act to grant temporary 
conditional exemptive relief relating to the reporting of: (1) Floor 
broker verbal announcements of firm orders on an exchange that are 
otherwise reported as systematized orders; (2) market maker verbal 
announcements of firm quotes on an exchange trading floor; (3) 
telephone discussions between an Industry Member and a client that may 
involve firm bid and offer communications; and (4) unstructured 
electronic and verbal communications that are not currently captured by 
Industry Member order management or execution systems (e.g., Bloomberg 
chats, text messages), subject to certain conditions, and expiring on 
July 31, 2026.

II. Background and Request for Relief

    On November 12, 2020, pursuant to section 36(a)(1) of the Exchange 
Act,\6\ and Rule 608(e) of the Exchange Act,\7\ the Commission granted 
the Participants an exemption, until July 31, 2023, from the 
requirement in section 6.4(d) of the CAT NMS Plan that requires each 
Participant, through its Compliance Rule, to require its Industry 
Members to record and electronically report to the Central Repository: 
(1) Floor broker verbal announcements of firm orders on an exchange 
that are otherwise reported as systematized orders; (2) market maker 
verbal announcements of firm quotes on an exchange trading floor; (3) 
telephone discussions between an Industry Member and a client that may 
involve firm bid and offer communications; and (4) unstructured 
electronic and verbal communications that are not currently captured by 
Industry Member order management or execution systems (e.g., Bloomberg 
chats, text messages), subject to certain conditions.\8\
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    \6\ 15 U.S.C. 78mm(a)(1).
    \7\ 17 CFR 242.608(e).
    \8\ Securities Exchange Act Release No. 90405, 85 FR 73544 
(November 18, 2020) (the ``2020 Order'').
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    In the March 31, 2023 Exemption Request, the Participants request 
that the Commission extend the temporary exemptive relief granted in 
the 2020 Order for an additional three years, to July 31, 2026. In 
support of their request, the Participants reiterate their belief that 
the verbal floor activity and unstructured verbal and electronic 
upstairs activity at issue were not previously contemplated by Rule 613 
or the CAT NMS Plan.\9\ The Participants state that the Commission 
disagreed with the Participants' view in the 2020 Order, but did not 
cite to any discussion in the CAT NMS Plan or the CAT NMS Plan Adopting 
Release regarding the activity at issue, nor did the Commission address 
the Participants' assertion that there was no cost-benefit analysis 
related to the capture and reporting of this activity in the CAT NMS 
Plan Adopting Release.\10\
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    \9\ March 31, 2023 Exemptive Request, at 4.
    \10\ See id. at 4.
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    The Participants also state that potential technological or 
business breakthroughs contemplated by the 2020 Order have not 
materialized, with neither natural language processing nor voice 
recognition technology currently sophisticated enough to reliably, 
accurately and consistently capture, parse and analyze and report 
interactions in the current trading environments and workflows.\11\ 
Accordingly, the Participants state that they, CAT Advisory Committee 
members, and Industry Member groups, including the Financial 
Information Forum (FIF), have considered this issue and continue to 
believe that capturing and interpreting this activity in an

[[Page 51370]]

automated manner without human intervention is not possible with 
current technology, nor would it be cost-effective to manually capture 
this activity.\12\
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    \11\ See id. at 5.
    \12\ See id.
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    The Participants also state that manually capturing and reporting 
verbal activity would be costly, inconsistent, prone to error, and 
disruptive.\13\ The Participants state that manually capturing these 
events is impracticable and not cost-effective because it would require 
listening to every verbal interaction either live or from tape and/or 
sifting through electronic communications, and that the determination 
of whether unstructured electronic and verbal activity involves a firm 
bid or offer is a manual, subjective process that could be highly prone 
to error resulting in overreporting and/or underreporting to the 
CAT.\14\ This would lead to inconsistent or less accurate data across 
CAT Reporters, because Industry Members will capture the same activity 
differently, resulting in misleading or incomplete views of 
transactions and limit regulators' ability to determine compliance with 
any reporting requirement.\15\
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    \13\ See id. at 5-6.
    \14\ See id.
    \15\ See id. at 6.
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    In addition, the Participants do not believe that the reporting of 
the verbal and manual quotes and orders at issue in the 2020 Order 
would provide meaningful value from a regulatory or surveillance 
perspective.\16\ The Participants state that orders on exchange floors 
are systematized and reportable to CAT, and manual orders in ``upstairs 
activity'' whether or not trades occur on an exchange floor or off-
floor are also reportable to CAT.\17\ The Participants also represent 
that the CAT Advisory Committee believes that bilateral negotiations in 
upstairs activity, such as between asset brokers and broker-dealers, or 
between two broker-dealers, are currently captured when the broker 
either creates an order, as in from an asset manager, or accepts an 
order, as in from another broker-dealer, and when the trade execution 
occurs.\18\ The Participants also state that verbal floor and 
unstructured verbal and electronic upstairs activities do not lend 
themselves to the types of market manipulation considered in the 
adoption of Rule 613, and that the costs of compliance would outweigh 
any incremental value for regulatory or surveillance purposes.\19\
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    \16\ See id. at 5-6.
    \17\ See id. at 6-7.
    \18\ See id. at 7.
    \19\ See id.
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III. Discussion of Participants' Exemption Request

    The Commission has carefully considered the Participants' exemption 
request. The Commission believes that extending temporary exemptive 
relief is, pursuant to section 36(a)(1) of the Exchange Act, 
appropriate in the public interest and consistent with the protection 
of investors, and that pursuant to Rule 608(e), this exemption is 
consistent with the public interest, the protection of investors, the 
maintenance of fair and orderly markets and the removal of impediments 
to, and the perfection of a national market system.
    The Participants dispute the Commission's position that verbal and 
manual quotes and orders are required to be reported to the CAT.\20\ 
Because the Commission believes that the Participants' request for an 
extension of the temporary exemption from these reporting requirements 
is reasonable, we do not address their arguments here.
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    \20\ See 2020 Order, supra note 8, at 73547; CAT NMS Plan at 
Section 1.1.
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    The Commission believes that extending the temporary exemptive 
relief should allow Participants and Industry Members time to 
collaborate, develop, and implement a reporting framework, guidelines, 
FAQs, and scenarios necessary for effective and efficient reporting of 
floor-based verbal quotes and order and upstairs activity.
    Based on the foregoing, pursuant to section 36(a)(1) of the 
Exchange Act, it is appropriate in the public interest and consistent 
with the protection of investors, and pursuant to Rule 608(e), it is 
consistent with the public interest, the protection of investors, the 
maintenance of fair and orderly markets and the removal of impediments 
to, and the perfection of a national market system to extend 
conditional temporary relief for the reporting of: (1) Floor broker 
verbal announcements of firm orders on an exchange that are otherwise 
reported as systematized orders; (2) market maker verbal announcements 
of firm quotes on an exchange trading floor; (3) telephone discussions 
between an Industry Member and a client that may involve firm bid and 
offer communications; and (4) unstructured electronic and verbal 
communications that are not currently captured by Industry Member order 
management or execution systems (e.g., Bloomberg chats, text messages). 
Extending the temporary exemptive relief until July 31, 2026, would 
provide Participants the time to develop and implement any necessary 
reporting guidance, specifications, and any technical changes to the 
CAT and is approximately four years after the date by which the 
Participants previously estimated that the CAT would be fully 
implemented, July 11, 2022.\21\ It would also provide CAT Reporters the 
time to fully consider and implement how to report such events and 
create the necessary technological and process changes required to 
capture these required quotes and orders while minimizing potential 
business disruptions and impacts to existing workflows. However, the 
Commission believes it is appropriate to provide exemptive relief 
subject to certain conditions discussed below.
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    \21\ See Securities Exchange Act Release No. 88890 (May 15, 
2020), 85 FR 31322, 31334 (May 22, 2020).
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IV. Conclusion

    The Commission believes it is appropriate to extend the temporary 
exemptive relief that exempts each Participant from the requirement in 
section 6.4(d) of the CAT NMS Plan for each Participant, through its 
Compliance Rule, to require its Industry Members to record and 
electronically report to the Central Repository the following 
communications, until July 31, 2026: (1) Floor broker verbal 
announcements of firm orders on an exchange that are otherwise reported 
as systematized orders; (2) market maker verbal announcements of firm 
quotes on an exchange trading floor; (3) telephone discussions between 
an Industry Member and a client that may involve firm bid and offer 
communications; and (4) unstructured electronic and verbal 
communications that are not currently captured by Industry Member order 
management or execution systems (e.g., Bloomberg chats, text messages).
    As a condition to this relief, the Participants must provide 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. 
Furthermore, this implementation plan for the reporting of these quotes 
and orders must: (1) identify verbal and manual workflows to facilitate 
the reporting of these quotes and orders; (2) provide or reference 
published guidelines for

[[Page 51371]]

Industry Members for determining when verbal or manual communications 
become firm and are required to be reported; and (3) provide or 
reference published technical specifications to allow for the reporting 
of verbal and manual quotes and orders by Industry Members. The purpose 
of these conditions is to help ensure that the Participants establish a 
framework necessary to permit the reporting of verbal and manual quotes 
and orders by Industry Members before the expiration of the temporary 
conditional exemptive relief.
    Accordingly, it is hereby ordered, pursuant to section 36(a)(1) of 
the Exchange Act,\22\ and Rule 608(e) of the Exchange Act \23\ that the 
Participants are granted an exemption, until July 31, 2026, from the 
requirement in section 6.4(d) of the CAT NMS Plan that requires each 
Participant, through its Compliance Rule, to require its Industry 
Members to record and electronically report to the Central Repository: 
(1) Floor broker verbal announcements of firm orders on an exchange 
that are otherwise reported as systematized orders; (2) market maker 
verbal announcements of firm quotes on an exchange trading floor; (3) 
telephone discussions between an Industry Member and a client that may 
involve firm bid and offer communications; and (4) unstructured 
electronic and verbal communications that are not currently captured by 
Industry Member order management or execution systems (e.g., Bloomberg 
chats, text messages), subject to the conditions described above.
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    \22\ 15 U.S.C. 78mm(a)(1).
    \23\ 17 CFR 242.608(e).

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    By the Commission.

    Dated: July 28, 2023.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-16518 Filed 8-2-23; 8:45 am]
BILLING CODE 8011-01-P