We’ve come a long way, baby. Or have we?
It is five years later and the U.S. equity markets still do not have a fully functional and operating audit trail. If this were the political arena and a government project, five years might seem normal but for the private sector – the financial sector – five years is an eternity. For a market that measures itself in microseconds, this wait seems insane.
But is it?
Getting the myriad parties together on the same page to agree on, design, build and then pay for the means of tracking highly sensitive stock market trading activity can take some amount of time. We are talking about hundreds of millions of market bids, offers, trades from over 1400 broker dealers and over twenty stock exchanges.
Just this week, The Financial Industry Regulatory Authority (Finra) selected Amazon Web Services to host the consolidated audit trail.
“We are collaborating to ensure that FINRA CAT can deliver an industry-leading platform that provides accessibility and transparency of capital-markets data to protect investors and the integrity of the financial market,” Teresa Carlson, vice president for worldwide public sector at AWS, was quoted as saying.
Thank God for Amazon. Can we get Prime Treatment on this?
“We are responsible for providing regulators with a consolidated view of the markets, so security, scalability, and resiliency are at the forefront of the design for the CAT platform,” said FINRA CAT CTO Scott Donaldson, in a statement. “FINRA has deep and tested experience in creating such an environment on AWS, and in view of that track record, FINRA CAT is pleased to select AWS for this major project.”
According to Amazon, the CAT will utilize AWS Key Management Service (KMS), Amazon GuardDuty, AWS CloudTrail and a host of other AWS technologies.
“Nobody expected the CAT to be built in a day but five years is beginning to look a lot like a government project,” said one insider speaking to Traders Magazine anonymously. “It hasn’t been a straight line to get to this point – as many parties and politics have slowed down the process.”
And it was a process that began back with the May 2010 Flash Crash. Twenty-ten. When the market regulators, Congress and others wanted answers surrounding the events of May 6, when the stock market for 36 minutes experienced a trillion dollar loss and partial rebound. A CFTC 2014 report described it as one of the most turbulent periods in the history of financial markets.
While there remains no system fully in place, the Securities and Exchange Commission continues to plan carefully for CAT. In September, the SEC voted to propose amendments to the national market system plan governing the CAT NMS Plan.
The proposed amendments to the CAT NMS Plan would require self-regulatory organizations that are participants to the CAT NMS Plan to file with the Commission and publish a complete implementation plan for the CAT and quarterly progress reports, each of which must be approved by the Operating Committee established by the CAT NMS Plan and submitted to the CEO, President, or equivalently situated senior officer at each Participant. In addition, the proposed amendments would include financial accountability provisions that establish target deadlines for four implementation milestones and reduce the amount of fee recovery available to the Participants if those target deadlines are missed.
“CAT needs to be implemented without further delays,” said SEC Chairman Jay Clayton at the time. “The proposed amendments are designed to bring greater transparency and accountability to the implementation of the CAT.”
Yes, despite some setbacks and changes within the initial framework, CAT is coming. In March, the CAT NMS Operating Committee, which runs the CAT program, opened a registration page to capture basic information from industry members and third-party CAT reporters, requiring broker dealers and technology providers to sign up and prepare for data submissions and file validation prior to live reporting. Firms are now registering.
Any industry member of a national securities exchange or national securities association that handles orders or quotes in National Market System (NMS) equity securities, OTC equity securities or listed options is required to register, said Paul McKenney, a senior director at FINRA on the March 19 industry webcast.
The following timeline remains in effect for the CAT:
December 16: Equities and Options – Industry Testing Begins
April to October: Equities – Reporting Go Live
May to December: Options – Reporting Go Live
April: Remaining Market Participants – Reporting Begins
This phase will center on file submission and data integrity. Then in April 2020, the system is expected go live in equities.
Just recently, SIFMA President and CEO Kenneth Bentsen, Jr. was quoted in Politico Pro saying liability remains a point of contention for the CAT. Under the proposed structure, firms that report to CAT are effectively held responsible in the event of a security breach, Bentsen says, and “that means all the legal, monetary and reputational liability falls directly on the firms when they have to turn over their clients’ data to which they’re compelled to do.”
This story originally appeared in the October 2014 issue off Traders Magazine
Start passing the collection plate as the Securities and Exchange Commission announced the new consolidated audit trail (CAT) will cost about $53 million to build.
The estimated cost to build, including the projected five operational costs of roughly $256 million was disclosed in an SEC filing published Wednesday. Also in the filing was the number of bidder vying to build the equity market surveillance system – six.
The need for a new CAT is rooting in the May 2010 “Flash Crash” whereas regulators didn’t have enough information to properly and speedily recreate the events leading up to the market meltdown. Much like an aircraft’s “black box,” CAT will allow regulators and others to examine specific details of a market event, such as the “flash crash,” understand it and draft rules and policies to mitigate future events.
The document calls for an independent corporate entity to be formed, CAT NMS LLC, which will oversee the new market watchdog system once fully operational and approved by the SEC.
The major U.S. stock and options exchanges, and the industry’s own overseer, the Financial Industry Regulatory Authority, worked in crafting the CAT proposal with the SEC.
FINRA is reported to be one of the bidders vying to build the system. The winning bidder is set to be selected shortly after the SEC formally approves the construction of CAT.
FINRA, along with the market exchanges, will run CAT NMS LLC.