Congress Works to Slow Down The CAT


“We need the SEC to require tagging and disclosure of high-frequency trades and quickly implement a consolidated audit trail so that objective and independent analysts — in academia, private analytic firms, the media and elsewhere — are given the opportunity to study and discern what effects high-frequency trading strategies have on long-term investors. They can also help determine which strategies should be considered manipulative.”

Pop quiz: Who said the above quote and when?

Answer:  Former Senator Ted Kaufman (D-DE) said those words on September 28, 2010 in his final speech on the Senate floor.

It’s been over seven years since Senator Kaufman gave that speech and it appears now that we are no closer today to implementing a Consolidated Audit Trail (CAT) than we were back then.  We have written recently about how the industry (namely the big three exchanges – NYSE, NASDAQ and BATS) has been trying to slow down the CAT citing cybersecurity issues as their main concern.  While the industry hammered away at this issue for the past few weeks, the firm that is responsible for building the CAT, Thesys Technologies , had kept quiet.  But earlier this week, Thesys finally spoke up and said the cybersecurity concerns with the CAT were overblown.  According to the WSJ, Thesys CEO Mike Beller said that the CAT was being built with the most sophisticated cybersecurity controls:

“The CAT is the next generation,” Mr. Beller told an audience at Georgetown University’s McDonough School of Business. “It’s a new system with what the regulators need to see what’s going on in the markets.” The database will make it easier for the SEC to spot manipulative trading and track down who is responsible for it, he said: “CAT will provide that transparency.”

SEC Chairman Clayton and SEC Commissioner Piwowar seemed to agree with Thesys and also indicated recently that the CAT would not be delayed.

But the stock exchanges were not prepared to give up their slowdown fight.  What do you do if regulators are about to go live with a system that might identify that your biggest clients could be market manipulators?  Of course, you go crying to Congress and get them to change the law.

Two members of Congress, Rep. Warren Davidson (R-OH) and Rep. Brad Sherman (D-CA), introduced H.R. 3973 known as the Market Data Protection Act which apparently is a bill intended to temporarily kill the CAT. According to Markets Media , the bill would “require that the SEC, FINRA, and the operator of the Consolidated Audit Trail, in consultation with the US Securities and Exchange Commission’s Chief Economist, develop comprehensive internal risk control mechanisms to safeguard and govern the storage of market data, all market data sharing agreements, and all academic research using market data.”

Yesterday, H.R. 3973 was marked up in the House Financial Services Committee and passed by a vote of 59-1.  The lone, courageous Congressman that voted against the bill was Rep. Stephen Lynch (D-MA).   The bill now moves on to the full House of representatives for a vote.  We are not sure how far the bill gets before November 15th which is the date that exchanges are scheduled to submit data to the CAT.

It’s been seven years since Senator Kaufman gave his speech on the Senate floor and our regulators and the industry still can’t build an appropriate surveillance system built.  Why is Congress asking for internal risk control mechanisms now?  Weren’t these controls discussed during the last seven years when the CAT was being developed?  Didn’t the developer of the CAT, Thesys Technologies, just say that the CAT was being built with the most sophisticated cybersecurity?  

Exchanges and their lobbyists seem to have won this battle.  They managed to convince certain members of Congress that the CAT will not be secure.  We hope that another Flash Crash, which could wipe away trillions of dollars in minutes, doesn’t occur soon because it will once again take regulators months or maybe even years again to figure out the cause and the culprits. Congratulations stock exchanges, you won, but investors just lost.