It is unclear whether US exchanges and the Financial Industry
Regulatory Authority (Finra) will modify an existing trade
repository or start from scratch to implement a consolidated
audit trail (CAT). Equity markets are in for some big changes
The Securities & Exchange Commission (SEC)
voted to approve the CAT on July 11, and a final rule was released yesterday. Self-regulatory
organisations (SROs) have 270 days, from the rules
publication in the federal register, to submit to the SEC a
plan to track trades in all US exchange-listed equities and
The trade data is to be linked to relevant
cross-market identifiers for broker-dealers and national
exchanges, along with the customers or customer advisers for
whom the trades are executed.
Much of the reporting burden will fall on
broker-dealers, who report trading information to different
repositories depending on the type of trade and exchange.
Equities traded on Nasdaq, for instance, are reported to the
Order Audit Trail System (OATS).
Michael Corrao, head of equity compliance at Knight
Capital, believes the new CAT will require a significant
technology effort by the SEC, the exchanges and brokerage
firms. I think it is going to be very challenging,
Firms are going to need to evaluate the need
for additional resources to help meet the requirements of the
rule, Corrao said. I expect firms will seek to add
programmers and compliance positions for their CAT
Lawyers and finance experts told IFLR it made more sense to upgrade the OATS
system than build a new CAT. The SECs final rule noted
OATS had trading gaps: a lack of data from Finra non-members,
market-making quotes, data from other repositories, options
data and customer identities.
Broker-dealers already using OATS will still have
to make major changes in their coding and reporting
infrastructure if the eventual CAT turns out to be an OATS
upgrade rather than an entirely new programme.
I expect the industry will not convert
existing OATS programming to the CAT requirement, Corrao
said. I believe it will be much easier to start with a
Broker-dealers were relieved by the SECs
decision to forgo a real-time reporting requirement in the
proposed rule, and instead allow all trading activity to be
reported by 8am the following morning. Concerns remain over the
reporting of customer identities, though.
The SEC rule provides for policies and procedures
designed to protect confidential information, but the specifics
will have to wait for the SRO plan.
WilmerHale partner Elizabeth Derbes said there has
been some controversy over the requirement to assign a unique
customer identifier, and it is unclear how customers will be
defined for this purpose, as the SEC seems to have backed off
the proposed definition that focused on the beneficial owner of
There was also some concern expressed in comment letters over the
possibility that customer investments could be leaked to the
market, allowing other investors to frontrun against a
The information collected through the
proposed CAT will only be available to and used by regulators
for regulatory and oversight purposes, therefore eliminating
the threat of frontrunning, a BATS Global Markets
spokesperson said in a response emailed to IFLR.
Impact on equities
SEC Chairman Mary Schapiro pointed to the so-called
Flash Crash of May 6 2010 and the four months it took
economists to organise trading information needed to analyse
the cause of that days volatility as reason for the
Schapiro said a CAT would make it easier to
investigate illegal trading activities, monitor market
structure and be better informed on the impact SEC rules have
on trading activity. She also mentioned that a CAT could
eliminate the need for some current reporting requirements
during the SECs open meeting on the rule.
Better enforcement of fraudulent activities and
more informed policy-making could increase investor
We are optimistic that the SEC obtains the
desired results of CAT reporting and that in the end investors
will feel more confident and comfortable in trading in the
equity markets, Corrao said.
Georgetown University financial markets professor
James Angel, who has testified before Congress on high
frequency trading, thinks the equities market will become more
consolidated as a result of compliance costs
specifically larger broker dealers will squeeze out some of the
The SECs rule requires SROs to establish an
advisory committee to inform their jointly submitted plan on
the CAT. The rule leaves a lot open for exchanges regarding
form and implementation.