Officials Call CAT ‘Long Overdue’

Regulators need to move forward as soon as possible to put into place a consolidated audit trail that would track orders in the markets, according to regulators and industry experts at a market structure conference on Wednesday.

Senior officials at both the Securities and Exchange Commission and the Financial Industry Regulatory Authority expressed eagerness to move forward with CAT.

The need for an industry-wide audit trail became more pressing after last year’s May 6 “flash crash.” Regulators would have been better able to investigate that event had there been a clear paper trail of trades in place.

Speaking at a conference hosted by the Securities Industry and Financial Markets Association, David Shillman, associate director of the SEC’s Division of Trading and Markets, called CAT the agency’s “number one” priority.

Thomas Gira, FINRA’s executive vice president for market regulation, echoed Shillman’s position.

“The concept of CAT is long overdue,” Gira said. “There’s an expectation gap between what market participants expect and what we actually have.”

CAT would provide a host of data for regulators, going beyond the large trader reporting requirements the SEC adopted in July.

Gira said the large trader rule could get folded into CAT.  That rule requires high-frequency and other large-volume traders to code their trade tickets with a unique ID and to time-stamp them when they execute.

FINRA already has its own Order Audit Trail System (OATS), which it is hoping will be the basis for the CAT system. Much of the industry supports the transformation of OATS into CAT because of familiarity with the system and a lower cost. But the SEC has indicated that OATS may not be adequate. Also, there are proposals from vendors angling to build CAT, including one from a subsidiary of Nasdaq OMX.

Of concern to many people in the industry is whether, unlike OATS, CAT will require reporting in real time. Such a requirement would mean extensive technology upgrades, though regulators believe it could still be feasible.

“If a real-time audit trail were approved by the Commission, monitoring technologies could be developed,” Shillman said.

Others were not so sure real-time reporting would be a good idea. Many in the industry feel real-time reporting would be excessively expensive and would add little value for regulators, since illegal market activity probably could not be identified until after the fact, anyway.

Shane Swanson, general counsel for electronic proprietary trading firm Eladian Partners, said it would be impossible to spot in real time any activity that was not so egregious it would be caught today anyway.

“Real time is the worst time,” said Chris Concannon, a partner with Virtu Financial, an electronic trading firm that employs a market making strategy. “In order to recognize manipulation, you have to look at patterns of activity over time.”

Concannon said the industry is supportive of CAT in concept, though. Not only will it catch bad actors, but it will allow regulators to verify when market manipulation is not occurring. Demonstrating that the markets are for the most part fair and honest will boost investor confidence, according to Concannon.

“I’m supportive of CAT, or DOG, or whatever we’re going to call it,” he said.

Others in the industry expressed hopes that CAT would reflect the large trader reporting rule so they could build upon the systems they are already developing.

“It’s going to be a lot of time and money, and we don’t want to have to start over with CAT,” said Vaishali Javeri, director and counsel for Credit Suisse.