Recent findings from Liquidnet’s latest report suggest that broader regulatory developments, including possible changes to Consolidated Audit Trail (CAT) governance and evolving corporate reporting requirements, could have significant implications for market participants. Traders Magazine spoke with Jeff O’Connor, US Head of Market Structure and Sell-Side ATS Strategy at Liquidnet, about the growing calls for CAT reform, the potential impact on broker-dealers and investors, and what these developments could mean for the future evolution of U.S. market structure.
What are the key concerns driving calls for potential reforms to the Consolidated Audit Trail governance structure?
In theory, Rule 613 addresses a real problem, the need for a robust, centralized system to track and analyze market activity across what is an extremely fragmented U.S. marketplace. However, in practice, the original bureaucratic structure in which to implement the rule has led to much governance friction, cost overruns, delayed deliveries, and implementation challenges. Across the many SRO’s that make up the operating committee, there is often failure to reach consensus on areas or themes such as specifications, scope, funding allocation, etc. And in the current structure, attempts at improvement need to be effected through amendments to the CAT NMS plan, which is a lengthy administrative exercise in itself.
In April, the SEC issued a concept release to solicit public comment on a comprehensive review of the CAT. The concept explicitly states feedback on whether CAT should exist in it’s current governance structure (highly fragmented) or if the SEC should take full ownership. Which begs the important question, does the SEC have the ability to undertake a structural overhaul with this complexity and magnitude?
The deadline for comments on the concept release is June 22, 2026. There is a strong lobby for SEC ownership. While it will be difficult to course change so drastically, and also keep the SRO access, the current NMS Plan has failed to deliver on the original plan – ie an efficient, cost-effective, accountable audit trail.
How could changes to CAT governance affect market transparency, regulatory oversight, and data security?
While it was perhaps altruistic to have the trading community own and drive the tool designed to audit that same community’s business, the shared ownership between the Exchanges and FINRA has resulted in a model of conflicting interests, lack of common consensus and general mismanagement. Yet it’s the SEC who’s the ultimate arbiter of the NMS, and hence one the biggest (if not the biggest) stakeholders for the purposes of surveillance, guidance and overseeing the market’s integrity. The wedge between the primary stakeholder and the actual owners has resulted in an imperfect system, where perhaps neither party is content. Direct ownership by the SEC would provide the driver of regulatory oversight with the keys to accomplish such task. While the topic of data security is difficult to speculate on, the SEC has made it clear security is a pillar of the current administration. Specifically, Chairman Atkins has reiterated the need to “protect investors” and “ensure the U.S. remain the best and most secure place in the world to invest and do business”.
Do you expect potential CAT reforms to reduce compliance costs for market participants, and if so, where could the biggest savings emerge?
Messaging capacity and data storage are major implication on the broker/dealer side. Resources devoted to full compliance might include developers to code to CAT requirements, legal/compliance officers needed to interpret the guidance, support staff to fix or amend breaks/mismatches, or capacity and storage tech spend. For hardware solutions or utilization of the cloud, both options become very expensive very quickly. Each of these considerations harms innovation and limits strategy spend elsewhere. While some improvements have been made such as the elimination of personally identifiable information (PII), CAT reportable events are averaging 50 billion/day. Only exacerbated by the continued growth in volume both in equities and option markets, and that trend marks a structural shift in liquidity sourcing within the market – ie the volumes aren’t going anywhere. And the more the SEC aggressively interprets what must be reported to achieve CAT goals, the data collection will continue to grow exponentially, and the costs to collect & store this data will follow.
What implications could CAT governance reforms have for trading behavior and overall market structure in U.S. equities?
It’s less a question of CAT’s impact on market structure but more CAT’s impact on the broker dealers trying to comply with market structure. From onboarding new clients to introducing new products or features, broker dealers must consider the ramifications of CAT. Should there be uncertainty or complications around reporting obligations, the result might be lengthened onboards, or more severely, a decision to halt or scale back new initiatives. Onerous regulatory compliance limits innovation. If the SEC was to take ownership, which is a real possibility, Chairman Atkins will attempt to re-snap some obvious inefficiencies while also balancing regulatory oversight, market structure evolution, investor privacy, and cost management. All while still solving for what the original intent of the CAT was – ie the detection of layering or spoofing to manipulate markets.
