When it comes to the Consolidated Audit Trail or CAT – its anything but quick as a cat.
It has been almost nine years since the May 10, 2010 Flash Crash that precipitated the Securities and Exchanges decision to create a new audit trail to serve as a transaction database. As conceived, this database would serve to help the regulator piece together events surrounding future market stress events.
Nine years later the equity markets, while healthy and functioning, still dont have a universal audit trail system.
So, what gives?
Most recently industry members and third-party trade-reporting providers who have an SRO membership and handle quotes or orders in NMS equities securities, OTC equities, or listed options have until June 27 to register as CAT reporters.
Firms that do not have an obligation to report to OATS have a responsibility to report to the CAT and will need to register, according to Paul McKenney, a senior director at FINRA.
That would be true whether or not you are reporting on your own behalf or somebody else is going to be reporting data on your behalf, he said during a recent industry conference call. Either way, you will have to submit a registration form.
The recently named plan processor has added a registration tab to the CAT NMS Plans homepage and started taking submissions on March 18.
We already have a few dozen registration forms in, said McKenney.
Amongst the information requested for registration includes: a registered principal, the manner of data submission (self-reporting or via a vendor), preferred reporting method (SFTP or via the CAT Reporting Portal), and the size of the firm (whether it has a capitalization of $500,000 or less). CAT reporters also will need to include a CAT Reporting Industry Member ID number.
Its an identifier assigned by an SRO like FINRA or one of the exchanges a firm will use to report trades, he noted. An equivalent would be a maker participant identifier, trader mnemonic, or something along those lines.
The plan processor also spent a portion of the call setting out phases 2as and 2bs testing and production timelines for equities and option respectively. The testing environment for phase 2a will begin in December 2019 and will last until April 2020, when data submission will go into production.
This will be focusing on file submission and data integrity, said McKenney. Those will be the only validation turned on at that point.
In April 2020, FINRA CAT will open firm-linkage validation testing, for reports submitted from within firms that include information regarding new orders with routes. Industry members can test until July 2020, when reporting the reporting requirement goes live.
Phase 2bs timeline also begins testing in December 2020 but will last until May 2021 while firm-linkage, inter-firm linkage, and exchange/TRF linkage validations will go live in August 2020, October 2020, and December 2020, respectively.
McKenney ended his presentation noting that the CAT NMS Help Desk is up, functional, and waiting to answer any industry questions.
However, when can the markets expect a fully functional system to go online? In a recent online poll conducted by Traders Magazine, twice the number of respondents (38%) believed that the Trump Administration would complete its border wall before CAT NMS finished the Consolidated Audit Trail, which is now slated for 2020.
The plan-sponsor switch reported, and later acknowledged by CAT NMS, at the end of January did not help quell many industry concerns for a project that was meant to start production in November 2017.
However, CAT NMS officials stated during a mid-month industry conference call that the move from Thesys CAT LLC to FINRA as plan processor would not affect the current timeline published by the SRO body.
Presenters acknowledged that it would take FINRA some time to get up to speed as the new plan processor, but the SRO would continue developing the CAT along its current roadmap and not use the situation as an opportunity to return to square one and develop a more OATS-like offering.
The new processor will not be starting scratch and will need to support the CATs existing fundamental design and message types, according to on executive. When questioned who would bear the extra costs of switching processors mid-project, a Finra executive said Simon responded that the SROs will need to work with the new processor to understand the new cost structure before determining how to allocate any additional expenses.
“Any fee filing that would impact industry members would be filed by the SROs and published by the Commission for comment,” the executive added. “I would note that in the near term.”
But Jack Miller, Head of Trading at Baird, said hes seen changes coinciding with the departure of Thesys as plan processor with rollout dates for broker-dealer reporting to CAT being pushed back from November 2019 to April 2020. He points out that is nearly 10 years from the May 2010 Flash Crash that inspired CAT in the first place.
But its hard to cast the departure of Thesys as the cause of delay as opposed to a symptom of why the CAT is taking so long in the first place, Miller said. its complicated. CAT requires a significant increase in the scope and breadth of data being reported and analyzed relative to OATS – including firm principal activity and inclusion of options – and at a level of detail that raises information security concerns materially. So, you have a significant technical challenge, and thats before considering the organizational challenges of getting a diverse set of industry participants to collaborate and comply with an aggressive timeline.
To that point, he added that Thesys was not selected as the processor until 2017. So, there has been a lengthy political process to get to the point of even beginning on the technical work in earnest.
Should the CAT be scrapped?
I dont expect CAT to go away although the road to full implementation will likely remain bumpy, Miller said.The regulatory imperative for this level of transparency is well established – and reinforced or extended several occasions thematically as with enhancements to Rule 606 and ATS disclosure requirements.I also expect the sell-side to be fairly-well prepared especially given the recent extension and the fact that participants were working toward a more aggressive deadline. Its likely we move ahead with the 2020 deadlines but that best practices around data submission continue to evolve post go-live once all parties gain real-life experience dealing with the actual data.
This article originally appeared in the March 2012 edition of Traders Magazine
CAT’s Long and Winding Road
By John D’Antona Jr.
Approval for a consolidated audit trail could come at any time from the Securities and Exchange Commission but putting CAT into place could take years.
After the SEC passes the rule, the SROs, exchanges and brokers will meet to discuss the rule’s provisions and decide how to build the audit trail and pay for it. Industry professionals estimate this could take several months or even a year, stretching into 2013 before a final blueprint is constructed and approved. Then, perhaps in late 2013 or 2014, the CAT could be operational.
One recent development, however, is that the SEC appears to have given up its demand that data be available in real time. The industry was concerned it would have added unnecessary costs to a project that is expected to cost $4.1 billion to build and $2.1 billion annually to maintain.
Creation of an audit trail is a top priority at the SEC.
Currently, regulators do not have a comprehensive database of accessible trade and order data. The SEC now wants to get the trail up and running sooner rather than later, and is willing to drop, at least for the time being, its controversial real-time reporting requirement.
Robert Colby, an attorney with Davis Polk & Wardwell and former deputy director of the SEC’s Division of Trading and Markets, believes that an audit trail is at the top of the SEC’s to-do list and will be approved any time. But there is also a long road ahead to get it in place.
“Even after approval by the SEC, finalizing a CAT will not be an easy process,” Colby said. “It could take a long time for the SROs to work out the details.”
The two lingering questions are who will provide the data and who will pay for CAT? Comment letters from brokers and others said that in a low-commission environment, costs associated with building CAT would likely be passed on to investors.
The SEC had issued a request for proposal for a data service provider that could give regulators a broad swath of existing real-time market data that is currently available.
According to Brendon Weiss, vice president of legal and government affairs at NYSE Euronext, this RFP might help the SEC estimate the cost of building a CAT. The RFP is posted on the Internet.
“That is a baby step to collecting real-time data and may assist the Commission in determining the real cost of an audit trail,” Weiss said.
The CAT was originally proposed by the SEC on May 26, 2010, just 20 days after the “flash crash.” The thinking behind the audit trail was to give regulators a central database of trade information to help them reconstruct trades during a destabilizing market event, so they could figure out what happened and possibly create safeguards to prevent future occurrences.
The industry initially gasped at the SEC’s astronomical price tag to create and operate the system. Several industry officials told Traders Magazine there are cheaper ways to build an audit trail, such as using an existing system such as OATs and adding more data functionality.
Davis Polk’s Colby added that the SEC will need to decide which of the wide variety of data types it proposed should be included in the final CAT. For example, the SEC proposed including types of so-called “soft data” in the CAT-examples are commission rates paid, subaccount allocations and short-sale borrow information.
More data translates into a higher overall cost.
“Ultimately, it is difficult to say that the end investor won’t bear the cost of this system,” Weiss said. “The price tag to implement such a program as proposed by the Commission seems like it would result in a pass-through type fee.”