Get the Pitchforks

Perhaps 10 years from now we’ll all look back at the building of the Consolidated Audit Trail (CAT) and have a laugh assured in the fact that it was finally created and is running effectively—but today is the day for ridicule.

As James Rundle and I discovered while writing our feature on the building of the CAT (see page 12), there is plenty of blame to go around. So let’s do just that—let’s play the blame game.

The Obvious Choice

For many, the biggest offender is Thesys Technologies, which won the original bid to build the CAT through its Thesys CAT subsidiary. It was removed as the plan processor at the end of January by the self-regulatory organizations (SROs). After speaking with dozens of experts on the subject, it became clear that Thesys low-balled its bid to build the CAT and for a multitude of reasons was never able to right the ship after the project started to go awry. 

But here’s the problem with blaming Thesys as I see it: Yes, it came in well under the other bidders and perhaps overplayed its success in building the Market Information and Data Analysis System (Midas)—a similar platform that the US Securities and Exchange Commission (SEC) uses to surveil the markets—but the SROs had to know that it was an unrealistically low offer. 

The fact is that they saw all the other bidders, some of which said that it would take hundreds-of-millions over five years to build the CAT. How is it possible that tougher questions were not asked of Thesys when its bid was in some cases 12 times under the highest bids? Either they were naïve or they did not do a proper job of vetting the candidates. Or maybe it’s option number three: They didn’t care that the bid was low because they never wanted this thing built in the first place and they knew that by taking a low-ball bid it would be tough to get such a complex platform off the ground. And here’s another problem: The SROs—considering they comprise a group of different kinds of organizations—haven’t adequately explained why they chose to ignore the fact that some said it would cost $300 billion to build the CAT, and here is why, while Thesys said it would take far less.

Again, this is just my opinion, but the SROs should be taking the majority of blame here. And the SROs are followed closely by the SEC, which has only recently begun to exert its influence over this process.

Take Action

It seems that the SEC both wants the CAT and wants absolutely nothing to do with it. The Commission—which, somewhat in its defense, has had different leaders throughout this process that has dragged on for several years—likes the idea of the CAT. After the Flash Crash (and the SEC’s impotent attempts to explain the reasons for it) there was a clear need for a platform that could surveil the markets in real time. But it also did not want to have to take the lead on its construction—and nor should it have to. But as this project started to fall behind schedule, the SEC made a conscious choice to stay quiet. No enforcement actions, no grandstanding—just business as usual. 

Over the past year, the SEC has taken a greater interest in the building of the CAT. And, as best I can tell, the pick of Manisha Kimmel as the so-called “CAT Tsar” has been quite popular among market participants. 

The problem is that if you are a cynic (which I am) then the decision to remove Thesys as the plan processor is just the latest delay tactic in a long line of delay tactics deployed by the SROs. If that is indeed the case, then we’re still nowhere closer to being able to explain the next Flash Crash or market irregularity. And you can’t blame the cynics for thinking as they (we) do, because the SROs are all silent on the subject and the SEC is still not being as proactive as it probably needs to be if it really wants to get this thing up and running.