Let us have this one: CAT’s out of the bag.
The Securities and Exchange Commission approved a funding proposal for the Consolidated Audit Trail (CAT), a database designed to allow regulators to monitor all activity and trades in the US equity market.
Up until now, regulators “lacked a consolidated view of the material information” of National Market System securities “to trace orders from originations, modifications, cancellations, routings, and executions,” according to SEC Chair Gary Gensler, who supported the proposal.
With the new proposal, though, brokers will largely be footing the bill. So, while the plan was approved by three of the five commissioners, it’ll face an uphill battle to win approval from broker and asset manager-adjacent trade groups.
Why it’s happening. Like the clunky iPod that’s entertaining dust bunnies in your closet somewhere, the CAT is firmly a product of the 2010s.
Following the “flash crash” of 2010, when hundreds of billions of dollars were scrubbed from big-name share prices in just minutes, the SEC initially adopted the CAT in 2012. Under the CAT, or Rule 613, national securities exchanges are required “to provide certain detailed information to a newly created central repository” so the SEC can “create, implement and maintain a consolidated audit trail.”
The whole setup was designed to help the Commission catch potential market manipulators or upcoming disruption. The idea was that the CAT would better regulate extreme market events like the flash crash, so the Dow Jones wouldn’t do bonkers stuff like drop around 9% in 30 minutes again.
How it will be funded. For all its potential usefulness, the CAT hasn’t been without controversy, and that’s largely the result of how it’s funded, as well as some privacy issues.
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Under the new funding model, stock exchanges, investors, and brokers will pay for the CAT.. Fees will vary based on share volumes, which supersedes a prior method of using market share to determine fees.
At present, the CAT is funded via loans to the Consolidated Audit Trail LLC, a private company owned by exchanges including the New York Stock Exchange and Nasdaq.
The new funding plan “establishes a framework that plan participants will use to recover the costs to create, develop, and maintain the CAT,” which includes “the method for allocating CAT costs among participants and the members of a national securities exchange.”
That’s a key part of the issue here. The Securities Industry and Financial Markets Association, the self-dubbed “voice of the nation’s securities industry,” represents broker-dealers, investment banks and asset managers. Following the SEC’s approval of the funding plan, the group noted that “the model assigns over 80% of CAT costs to industry member broker-dealers.”
“This unfair allocation of CAT costs is especially problematic given that industry members have no role in the governance, oversight, or design of CAT and obtain no direct tangible benefits from its operation—indeed, the industry has not even been permitted to obtain or review CAT data used in the context of SEC regulatory initiatives,” the group wrote.
Within the SEC, support for the proposed funding plan has largely been split along party lines. While the Commission's three Democrats won the day, two Republican members voiced concerns over cost.