Thesys Technologies announced that the next step in building the Consolidated Audit Trail (CAT) has been achieved, as the technology subsidiary of Tradeworx signed the contract with the self-regulatory organizations (SROs) to build the platform that will manage the tracking and auditing of all stocks and options transactions by the Securities and Exchange Commission (SEC).

In January, the consortium of SROs tapped Thesys to build and replace legacy reporting systems, including the Order Audit Trail System (Oats), which was built by the Financial Industry Regulatory Authority (Finra) and was thought to be the favorite to win the CAT bid.

In what came as something of a surprise, Thesys edged out Finra for a couple reasons, including what would happen should there be a cyberattack. In a feature detailing how Thesys won the bid, several sources told Waters that Finra’s unwillingness to take on all liability in case of a potential breach of the CAT database was a non-negotiable point for the SROs. Thesys has long been a vocal proponent of the importance of the CAT’s cybersecurity defenses.

“Security was a key element of the Thesys CAT bid—designed from the ground up and deeply integrated into the architecture,” Anshul Anand, senior vice president of business development for Thesys Technologies, tells Waters. “Through the bid process, we continued to innovate on security features related to advanced encryption and access management. We convened a panel of world-renowned security experts to help design and vet these security concepts.”

To act as the CAT plan processor, Thesys established Thesys CAT LLC as a separate legal entity. Thesys CAT is partnering with IBM, which will provide hosting on the IBM Cloud, cognitive computing and security services, technology infrastructure, program management, consulting and help desk services. [For more on IBM’s involvement in the project, click here.]

Latham & Watkins is serving as legal counsel to Thesys CAT. The SROs, on the other hand, jointly formed CAT NMS LLC to oversee the build and operations of the CAT system.

Next Steps

Anand says that the company has “a number of internal work streams” looking at the technology, itself, as well as for operations and security.

“We’re happy to have the contract with the SROs in place. Throughout the past few months since we won the bid back in January, we’ve been working on planning and delivering the CAT system,” he says. “We are currently focused on the execution timeline outlined in the CAT NMS Plan—as part of the recent Industry Outreach Webex hosted by the SROs, they shared a few of the important next steps, including publication of technical specifications and billing. Simultaneously we have been building a strong Thesys CAT bench under an exceptional management team, which we’ll be providing further details on in the near future.”

In November, SROs will begin submitting data to the CAT. Starting in January 2018, SROs will begin implementing enhanced surveillance based on CAT data. And in November 2018, large broker-dealers will begin submitting data to the CAT.

The First Bill

According to a recent Finra rule filing, the CAT will cost the industry $50.7 million for the current fiscal year, which began on Nov. 21, 2016. Of that cost, $37.5 million will be used for operational development of the platform, while the remaining $13.2 million will cover third-party support costs, operational reserve and insurance costs.

To spread out the costs, industry members—i.e., broker-dealers—will cover 75 percent of the cost using a tiered structure depending on how much message traffic they generate. Execution venues—including equity and options exchanges, as well as ATSes—will cover the other 25 percent, with equity exchanges taking 75 percent of that cost.

From the filing: “The Operating Committee determined that a 75/25 division between Equity and Options Execution Venues maintained elasticity across the funding model as well the greatest level of fee equitability and comparability based on the current number of Equity and Options Execution Venues.”