The Securities and Exchange Commission (SEC) should disapprove the amendment to the consolidated audit trail (CAT) NMS Plan, according to Michael Blaugrund, COO for NYSE Group.
“Though I’m actually hopeful the SROs may consider withdrawing it before it actually comes to that,” he said during the STA Open Call.
On March 31, 2021, the self-regulatory organizations (SROs) filed a Plan Amendment to the CAT NMS Plan with the SEC to adopt a revised funding model.
On May 10, 2021, NYSE Group issued a comment letter, which opposes the Funding Proposal and offers an alternative.
Fundamentally, the proposal consists of a 75/25% split of the CAT costs between the industry (i.e. registered broker-dealers, including Alternative Trading Systems) and Participants (i.e. exchanges and FINRA).
“The decision to have 75% of the fees go to industry members and 25% – to the participants, is very arbitrary,” Blaugrund said.
According to the NYSE’s letter, the Amendment does not establish an adequate basis for its allocation methodology, nor does it adequately articulate the composition of the CAT costs it would allocate to the industry.
The message traffic metrics have been “massaged and modified in such a way, it’s kind of beyond recognition,” Blaugrund said.
“Because option market makers play a really important important role in our markets, we want to encourage options market making. So I understand why that factor is applied. But the bottom line is that we’ve now kind of perturbed this logic in such a way that the claimants message traffic driven is really no longer true,” he said.
“Similarly, on the participant side, splitting the fees, 60/40 between equities and options, using market share, but having a floor and then giving a very sort of unique treatment to FINRA – it’s well intentioned, but it’s just impermissible,” he added.
Blaugrund said that the other complaint that NYSE has is that the industry is being asked to fund their fare share of a “very significant technology project that’s expensive, and from a data perspective expected to continuously grow.”
“I think all of us operate in businesses where from time to time we have to make expenditures and then get paid back. And when we do, we bring receipts, and people expect that you’re going to give them some clarity about what you spent the money on,” he said.
“There’s going to be significant software development and data storage and info security spend. But all of that detail is missing from the proposal,” he argued.
“My vantage point is that this project is very cumbersome. It’s very large. It has really difficult requirements. I think that all of those things contribute to it being very expensive. I don’t believe it’s been mismanaged. And I think that the SROs would win over a lot of its skeptics if the transparency was available so that people could sort of judge the facts directly,” he added.
Blaugrund believes that SROs can come up with something better: “I think that the industry can help shape that conversation through public comment periods, like the one we’re under, or through dialogues like this. From our perspective, whatever is proposed, it ought to have a very clear basis to be supported with transparent financials, it ought to be predictable,” he said.
The NYSE letter recommends the SROs to propose a structure that is (1) based on executed volume instead of message traffic and (2) administered like SEC Section 31 fees.
“We recommend establishing a cost allocation model that evenly splits the per share cost three ways: 1/3 to the buyer, 1/3 to the seller, and 1/3 to the Exchange or TRF,” Blaugrund said.
“You apply that and so people can put it into their algos, can put it into their risk models, can put it into their billing systems – it’s very, very simple. And if you charge too much or if you charge too little, you adjust in the next period,” he said.
“I personally think there’s something elegant in a third, a third a third. But if there are other ideas, if people want to adopt something that’s more directly, like section 31, where the seller pays, we can do that. But I think finding something that’s easily understood, easily implementable, and has a really clear basis would give the industry confidence that this is being done fairly,” he added.