Today, the Commission is considering whether to approve self-regulatory organizations’ amendments to the 2016 National Market System Plan that established the Consolidated Audit Trail (CAT). These amendments would modify the method by which allowable costs associated with building and operating the CAT are allocated. Commission rules provide that we shall approve amendments to an effective NMS Plan if they are, among other things, “necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets.”[1] I support the staff recommendation that the SROs’ NMS Plan amendments be approved as I believe they satisfy the requirements under the Exchange Act and the Commission’s Rule 608.

At its core, the consolidated audit trail was created to enable regulators to track activity efficiently and accurately in National Market System securities. Prior to CAT’s creation, regulators lacked a consolidated view of the material information of all orders in NMS securities to trace orders from originations, modifications, cancellations, routings, and executions. While some SROs maintained audit trails, they varied in scope, format, completeness, accuracy, and accessibility. Thus, at best, SROs had a fragmented view of important market data.

During the flash crash of 2010, market regulators did not have readily available consolidated order data. Just three weeks later, the SEC proposed Rule 613. When the rule was adopted in 2012, Chair Mary Schapiro said, “A consolidated audit trail that accurately tracks orders throughout their lifecycle and identifies the broker-dealers handling them will provide FINRA, other SROs, and us with an unprecedented ability to effectively oversee the markets we regulate.”[2]

In 2016, the Commission approved the SROs proposed NMS plan creating the CAT.[3] That plan included a funding model for how the costs of the CAT would be allocated amongst the SROs and their industry members.

The SRO filing we are considering today addresses an important but narrow issue: the allocation of funding of recoverable costs for CAT. While it addresses the cost allocations, it leaves in place the rest of the 2016 NMS plan as amended in 2020.[4] Further, consistent with Exchange Act provisions, prior to charging fees, SRO participants will be required to make periodic filings to the Commission and that will be subject to public comment. In this proposal, the SROs have committed to including detailed information regarding fees and associated budgets in those fee filings.

Market regulators—SROs and the Commission—already have benefitted from CAT in surveillance and enforcement work. For example, with respect to the Commission, CAT data was beneficial for our staff’s GameStop report from 2021,[5] for our analysis of insider trading,[6] as well as for a number of the Commission’s proposed rulemakings.

The amendments are the product of years of work by the SROs and are based upon significant engagement with market participants and the public. There have been multiple filings over the years, each put out for public comment. Today’s SRO-proposed amendments to the NMS plan have been modified from earlier filings based on that public engagement.

The SRO amendments will change the 2016 CAT funding structure in two ways.

First, the fees participants pay to fund CAT will be determined by executed shares. Previously, the funding amount was determined by different factors. Venues like exchanges and alternative trading systems paid according to their market share, and industry members like broker-dealers paid according to their message traffic.

Second, the fees will be divided evenly into thirds across three parties: the SROs, executing brokers representing buyers, and executing brokers representing sellers. Previously, allocation was not specified between venues and broker-dealers.

Now, for greater detail, I’d like to turn things over to David Saltiel, Deputy Director of the Division of Trading and Markets.

I’d like to thank the following staff for their work on this matter, including:

• David Saltiel, Haoxiang Zhu, Andrea Orr, Roni Bergoffen, Jennifer Colihan, Frank Pigott, Sharon Park, David Shillman, David Hsu, Mark Donohue, Erika Berg, Leigh Duffy, Sakisha Jackson, and Katriana Roh in the Division of Trading and Markets;
• Jessica Wachter, Amy Edwards, Hans Heidle, Charles Woodworth, Patti Vegella, and Joseph Luckett in the Division of Economic and Risk Analysis; and
• Megan Barbero, Tracey Hardin, Dan Matro, Meridith Mitchell, Robert Teply, Maureen Johansen, and Cynthia Ginsberg in the Office of the General Counsel.