SEC Grants Temporary Exemptive Relief from CAT Reporting for Verbal Quotes and Orders

November 19th | 2020

The SEC recently granted FINRA CAT Participants, (i.e., exchanges) a request for a temporary exemption from Section 6.4(d) of the CAT NMS Plan, which will now expire on July 31, 2023. Section 6.4(d) of the CAT NMS Plan requires that each Participant, through its Compliance Rule, require its Industry Members (i.e., broker-dealers) to record and electronically report to the Central Repository: (1) floor broker verbal announcements of firm bids and offers on an exchange trading floor that are otherwise reported as systematized orders; and (2) market maker verbal announcements of firm quotes on an exchange trading floor, to the extent either are considered orders reportable under Rule 613 of Regulation NMS.

The Participants cited high costs (i.e., ~$500 million), technical limitations, and negative side effects on customer execution quality in support of their exemptive request. The Participants, for example, doubted whether technology exists today that could capture all of the verbal quoting and order activity that takes place on a trading floor. The Participant also stated that reporting of this activity may also slow trading processes at certain broker-dealers, and/or may increase the time to initiate a trade, which could cause clients potentially to receive less advantageous pricing.

In granting the request, the SEC ultimately found the Participants’ request to delay the reporting requirements for verbal quotes and orders is reasonable. While including verbal quotes and orders in the CAT will provide regulatory benefits, the SEC acknowledges that the reporting of such orders and quotes involves complexity and/or costs, especially because capture of this information may require significant manual human intervention. Thus, the SEC granting relief to delay the reporting of verbal quotes and orders to the CAT could allow Participants and Industry Members time to develop or implement technological changes necessary to capture this information at a lower cost.

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