Clocking the CAT

Next month, Waters will publish a feature looking at the technology issues surrounding the implementation of the Consolidated Audit Trail (CAT). The CAT, which will serve as a massive database for tracking equities and options, has been in the spotlight since it was first approved by the US Securities and Exchange Commission in July 2012, but the talks about the platform gained momentum when the SEC voted to publish the National Market System (NMS) plan for public comment and released a notice regarding it.

Clock synchronization, while not the sexiest of topics, is a big issue for the CAT. The Order Audit Trail System (OATS), which is maintained by the Financial Industry Regulatory Authority (Finra) and the system most often compared to the CAT, currently has clock synchronization standardized within 50 milliseconds.

David Shillman, associate director of the division of trading and markets at the SEC, said the Commission is worried about a 50 millisecond clock-synch requirement because that would mean only 8 percent of order events that are cross-market could be sequenced with precision in the equities space. Shillman, who spoke at the Securities Industry and Financial Markets Association (Sifma) Ops conference held in Miami Beach, Fla., in May, said a possible alternative is not having an overall clock-synch standard.

"Perhaps there could be different clock-synch standards depending on the industry segment. Exchanges, for example, would have clock synch in much finer increments (microseconds) than other segments," Shillman said. "The thought was maybe a more delineated clock-synch standard could provide the benefits of great clock synch for the types of events where granular clock synch would be very meaningful and where the industry may very well already be synching to the tighter standards, but then have looser standards for the other elements."

Mike Beller, CEO of Tradeworx, the high-frequency trading firm that owns Thesys Technologies, which is one of the three remaining bidders left in the running to build the CAT, says he agrees that segmentation is the proper solution to the problem. Firms that do extremely high volumes tend to have more technology, Beller says, so the burden of meeting those requirements won't be as hard.

"For small firms doing a few trades a day, of course it's silly to ask them to be highly synchronized," Beller says.

Allocations

Maura Miller, director of securities compliance at Credit Suisse Securities, said a recent Finra rule that was approved requires essentially the same 50 millisecond synchronization requirement the CAT does, further pressing the issue that firms look into clock synchronization.

Miller, who also spoke at Sifma Ops and is a member of the CAT's Development Advisory Group (DAG), said an even bigger ask of the CAT are the requirements around allocation timestamps. Miller said the back-office systems that would be required to do that aren't nearly as sophisticated as the trading systems, which she said are largely already compliant.

Jess Haberman, who is Fidessa's compliance director and also a member of the DAG, doesn't feel there should be a significant amount of importance put on synchronization and timestamps for allocations.

"It doesn't affect the market. When you allocate has no effect on what other people are going to buy or sell or what they see in the market," Haberman says. "It doesn't seem necessary that you would have the same degree of precision."