SEC Democratic Commissioner Slams CAT Delays

On Wednesday, the Securities and Exchange Commission’s Robert Jackson slammed the lack of progress in building the Consolidated Audit Tape (CAT) as he dissented from a new proposal to modernize the National Market System (NMS).

“Our history governing markets through NMS plans is hardly encouraging. One need look no further than the Consolidated Audit Trail to see what happens when the Commission replaces real regulations with mere hope that stock exchanges will act against their own interests,” said Jackson, who is one of two Democratic commissioners.

The SEC on Wednesday announced that it is seeking comment on a proposed order to modernize the NMS. The CAT is one attempt to modernize equities and options markets, but has been subject to repeated delays for six years.

“Rather than give investors a real say over the data that drives our markets, today’s release merely invites for-profit exchanges to draft their own rules on these questions. …That approach has failed investors before, and there’s no reason to expect it to succeed now,” Jackson said.

The SEC’s announcement says the proposal would direct the equities exchanges and self-regulatory organization Finra to file a new NMS plan with the Commission designed to increase transparency.

Jackson said that by proposing an order under the NMS, the SEC is asking the exchanges to address the conflicts of interest arising from the fact that they profit from the sale of market data.

“No one should be surprised when the exchanges respond that, rather than give investors votes on the operation of the public feed, they’d rather continue controlling it themselves,” he said. “Instead of a clear solution to an obvious problem, today’s proposal will produce little more than a long process that will benefit lobbyists and lawyers—but not the ordinary investors living with the tax of rising data costs in our markets.”

Slow CAT

The CAT, a centralized repository of market data, is intended as an industry response to the Flash Crash of 2010. It is supposed to allow regulators to track activity in US equity and options markets. But the ambitious project has been beset by disruptions, notably the removal from the project of Thesys CAT, the technology company initially contracted to build it. As WatersTechnology reported at the time, the industry laid the blame for these disruptions equally with the vendors, the self-regulatory organizations tasked with running the project, and with the regulators themselves.

The database is intended to capture all trade data, from all market participants. Testing of industry reporting to the CAT began in mid-December, amid concerns from broker-dealers about the CAT reporting agreement. Reporting firms have to sign this agreement in order to gain access to the testing environment, but many are delaying: they believe the agreement protects exchanges from liability and opens up sensitive data. 

“Our biggest problem with the agreement is that there are several clauses throughout it that basically shield the SROs from any liability in connection with CAT reporting,” Ellen Greene, managing director of Sifma’s Financial Services Operations group, told WatersTechnology as testing began. “Our firms are contributing not only sensitive customer data, but they’re also sending in institutional data, including their trade data. This is a very high breach target, and we just don’t feel that it’s appropriate for members to sign away liability, given the potential risk that this opens up for them.”

Live production of the CAT in April is mainly for industry members dealing with equities that were previously reporters to Finra’s Order Audit Trail System (OATS). Options, specific to large broker-dealers, go live a month later. Full production is expected to take place by December 2021.

CAT reporters must pass several tests to prove their data has an error rate of 10% or less before they can participate in live production by April 20, 2020.

With additional reporting by Mariella Reason.

Next week, WatersTechnology takes a deep dive into how the CAT is progressing, as broker-dealers brace for what follows the test phase.