While the construction of the $23 trillion equity market’s consolidated audit trail (CAT) is fraught with concerns and issues, perhaps none is larger than who or how the surveillance system will be paid for.
Hmmm.
In the second part of an ongoing series on the CAT, “Consolidated Audit Trail (Part II): Problems and Pitfalls,” co-authors partner, COO Alex Tabb and technology research analyst Shagun Bali delve into the six critical problems surrounding the system, noting none is of more concern than just who is going to foot the bill. Also, Tabb examined the potential sources of funding and role of broker-dealers, data managers and management, construction timeline, system complexity, data and system security and governance.
The first report was released last week.
Tabb and Bali noted that that few vendors have the technical expertise to engineer, construct and manage a massive data environment as large as the CAT, as well as the equities and options market structure expertise to pull off such a formidable challenge.
“Characterizing the Consolidated Audit Trail as merely a big project understates the technological and project management challenges that come with building the largest, most complicated data storage project in the history of the U.S. capital markets,” Tabb prefaced its second report.
When operational, the CAT
“The only thing that may be more difficult than designing, developing and implementing the CAT will be the project and relationship management skills needed to get the approximately 1,800 market data providers on board and compliant within the SEC Rule 613 timelines,” Bali said.
Rule 613 details the plan for developing CAT.
Cost estimates range from $30 million to build and $30 million per year to run, upwards of $525 million for the first five years, without a clear understanding how participants will pay for construction, and only a few hints of how the CAT will sustain itself financially once built.
Tabb wrote that the first and most important challenge the SROs need to address is the CAT funding issue.
“There is no clear understanding of how the participants will pay for the construction of the CAT, and only a few hints on how the CAT will sustain itself financially once completed,” Bali said.”However, no matter how you slice it, ‘all roads lead to Rome,’ or in this case, all CAT funding mechanisms lead to the broker- dealers.”
For this report, TABB reached out to 100 industry participants from the capital markets community to collect their sentiment and concerns regarding the CAT, research that highlights how the community recognizes the benefits, but are concerned about the details, problems, pitfalls and pain points requiring attention and solutions.
Aside from cost, the report found that the industry is most concerned about data security, control and governance, especially broker/dealers who want set rules and guidelines covering how the SRO’s will utilize their data. Beyond funding, options data – 60% of the data will come from the options market – is adding complexity.
Tabb’s report noted that multiple solution sets exist and while none of the proposed options are “wrong,” some are more “right,” especially considering the project’s size, scale, scope and complexity.
“CAT is necessary,” said Bali, “but the bigger question for many on the sell-side starts with, “can we afford it?” What the broker/dealers tell TABB is that they need a solution from the SROs, reassuring them it will lighten their investment burden.”
For CAT to succeed Bali added, is that for everyone involved – the SEC, SROs, broker-dealers and the CAT processor – need to be in harmony.
“The SROs need the support of the broker-dealers, addressing all the issues at hand and suggesting plans alleviating their concerns,” he said.
