Have You Seen the CAT?


Have you seen the CAT?  Of course, we’re not referring to the feline kind but the regulatory kind. It’s been over 2 1/2 years now since the SEC approved​ the establishment of a Consolidated Audit Trail (CAT) and yet we haven’t heard much about the CAT since the SRO’s filed their CAT NMS plan with the SEC back in September of 2014.

We decided to check in on the status of the CAT by reviewing the CAT NMS Plan website​ where we happened to find two very interesting documents:

1- Summary of the Consolidated Audit Trail Initiative dated January 27,2015    – This document contains some stats on what the CAT will do when its eventually built, a timeline of events so far, governance information, information on the selection of the CAT Plan Processor selection (they are down to a short list of 6 bidders), a summary of CAT meetings, the list of firms that are part of the Development Advisory Group (DAG), a current CAT Timeline and a list of topics that they are looking for exemptive relief.

This is a very good document for industry watchdogs to monitor.  The Consolidated Audit Trail is a critical system that is long overdue.  For regulators to properly police our high-speed electronic markets, they need to see exactly what is going on down to the microsecond.  SEC Commissioner Stein knows this and had this to say about the CAT in a speech last year:

“But we need the deeper information that only the CAT will provide.  And we also need help in getting it up and running as soon as possible.  All market participants should be involved in helping to develop the CAT—it is not, nor should it be, the exclusive province of the Commission and the SROs.  And we must also move quickly.  Until regulators, buy-side traders, brokers, consultants, and the academic community can pore over the data, we simply don’t know what we’re missing.”

2-  CAT NMS Plan Exemptive Request Letter dated January 30, 2015

We expected that the SRO’s who are building the CAT would start to ask for relief on some of the more difficult parts to build.  In this letter the SRO’s ask for relief on five areas from Rule 613:

(1)   options market maker quotes; (2) Customer-IDs; (3) CAT-Reporter-IDs; (4) linking executions to specific subaccount allocations on Allocation Reports; and (5) time stamp granularity.

The relief measure concerning identification of customers concerns us the most. For the CAT to be effective, orders need to be tracked as far down the food chain as possible. SEC Rule 613 requires

Each customer as well as any customer adviser who has trading discretion over a customer’s account to be assigned a unique, cross-market customer identifier to be reported to the central repository ​for every order originated.”

Apparently, the SRO’s are having issues with creating customer ID’s and are asking for this relief:

SRO’s to require broker-dealers to report  firm-designated identifiers rather than Customer-IDs in the CAT NMS Plan.. 

We’re not sure if the SRO’s relief measure would dilute the reporting requirements of the CAT but we think market participants should be paying attention to these proposed changes.  After all, it would be a shame to spend this much time and money on a system that does not give regulators the data they need to properly police our markets.