The SEC voted to publish for comment a proposal to create a single database that would allow regulators to track trading activity in the U.S. equity and options markets, referred to as a consolidated audit trail (“CAT”). The CAT is being created by a joint plan of eighteen national securities exchanges and FINRA (collectively, the self-regulatory organizations or “SROs”) pursuant to Rule 613 of Regulation NMS under the Securities Exchange Act of 1934. Plans for the CAT were spurred by the May 6, 2010 “flash crash,” when more than 20,000 trades were executed at erroneous prices. However, the project has taken years to get off the ground because of disagreements among industry groups as to the scope, costs and governance of such a project.
The CAT proposal provides that a plan processor would build a central repository that would receive, consolidate and retain reported trade and order data. Under the proposal, throughout the life cycle of an order, including origination, routing, modification, cancellation and execution, the SROs and broker-dealers would be required to submit certain information about the order to the repository. This information would include an identifier for the customer submitting the order, an identifier for the broker-dealer receiving the order, the date and time of the order, and the security symbol, price, size, order type and other material terms.
According to the SEC, the CAT would increase the effectiveness of event reconstruction, monitoring and the ability to identify and investigate potential market misconduct. SEC Chair Mary Jo White noted in her statement at the SEC’s recent open meeting that without a CAT, regulators do not have ready access to a comprehensive database of accurate information about orders entered and trades executed across the U.S. securities markets. Without such information, it is increasingly difficult for regulators to safeguard investors and the markets. Chair White further stated that the CAT will help analyze and reconstruct market events like the “flash crash” and more efficiently identify misconduct. However, critics of the proposal say that it comes too late, as it will be at least another three years before the proposal is fully implemented. In addition, critics say that the plan will not provide regulators with accurate information about the markets, as the plan allows for a high margin of error when reporting details of orders and the time stamps used by exchanges and broker-dealers are permitted to be too far out of sync.
The full CAT proposal will be published on the SEC’s website and in the Federal Register. Comments on the CAT proposal must be received within 60 days of publication in the federal register. If the SEC makes the necessary findings, it must then approve the proposal within 180 days.