The CAT and the Rat


“I know some good games we could play,” Said the cat. “I know some new tricks,” Said the Cat in the Hat.


From The Cat In The Hat – Dr. Seus


Well, as we all know there are tangible costs that can be brought about by technological and regulatory evolution. Just ask any buyside desk that now has dedicated market structure experts, as well as technical staff ready to analyze big data collected in fancy TCA. There are also less obvious costs to the industry, which can be quite significant in their own right.


Let’s look at the SEC’s Consolidated Audit Trail (CAT), which is a statutory requirement approved in July of 2012. Talked about for several years in the aftermath of the Flash Crash, details are starting to come to light as the bidding process has begun. According to this Reuters article, Thirty One companies have indicated that they plan to submit bids. These companies include FINRA, NASDAQ, BATS, NYSE, Tradeworx, Google, IBM, as well as a few foreign bidders.


The CAT will be created by a joint plan of the seventeen national securities exchanges and FINRA (collectively the SROs), pursuant to SEC Rule 613. It will be a very large challenge for all of these exchanges and FINRA to collaborate, especially as they will compete with each other in contracting to develop the CAT, as well as compete with developers outside the financial industry. The selection of the winning bidder for the CAT will even be made by these same financial industry insiders – a potentially large conflict of interest.


Here is what you all should know about the CAT so far:


–          Here is a website to watch for news and announcements about the CAT’s progress.

–          Implementation timeline is as per this link.

–          Here are questions that are already anticipated by the industry.

–          Here are public comments made regarding CAT implementation.

–          Order lives will be tracked back to end-customers.


There will be much more to digest over the coming year; however there are three issues that are currently on our minds:

1)      How will this system and its ongoing upkeep be paid for?

2)      Given that the actual trading of stock has become a much smaller part of the for-profit exchange model, where is the financial incentive for exchanges to devote so much resource to the development and difficult collaboration with numerous other companies, as well as the SEC?

3)      The tracking of orders, from large parent orders to child orders, will be linked we presume. Is there potential for leakage? Will care be taken that mechanisms are not coded into a CAT which can create information leakage issues that are exploitable in intended AND unintended ways?


The CAT is necessary in our conflicted markets, as they currently exist. And as such we must be diligent in insuring that its development doesn’t turn into another perfectly executed plan – like REG NMS. However, we can’t help but be amazed that the need for a CAT is only created because of the fragmented mess of a market structure brought about by past regulation. Would complex monitoring and systems be needed system-wide in  a simple structure void of conflicts of interest? If latency and algorithmic arms races were not created (in an effort to play rebate arbitrage and order-detection games in a labyrinth), would a CAT even be necessary? Would a simple fix of the foundation of the market negate its need?


This is not a good game,” Said our fish as he lit. “No, I do not like it, Not one little bit!” “Now look what you did!” Said the fish to the cat. “Now look at this house! Look at this! Look at that! You sank our toy ship, Sank it deep in the cake. You shook up our house And you bent our new rake.