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CAT Is Out of the Bag

Traders Magazine Online News, November 28, 2018

Ivy Schmerken

Despite a one-year delay and other missed deadlines, the order-tracking system known as the Continuous Audit Trail is back on track as exchanges were due to begin reporting required equities and options data into the CAT on Nov. 15.

That message was conveyed by panelists at a recent industry conference.

Executives speaking at Tabb Group’s FinTech Festival on Nov. 1st spoke about the hurdles and opportunities of CAT, including the complexity of linking order data across equities and options, along with cybersecurity concerns about the protection of customer data. They also said there were opportunities to leverage the data in other areas.

“I think this has been a long-time coming,’ said Adam Dix, director of regulatory reporting for Kx, a division of First Derivatives plc, who spoke on the panel. “From what we see this is going to be a reality,” said Dix. On Sept. 30, the customer specification for large broker-dealer reporting was posted. “Everyone knows that this is now final,” said Dix.

However, a Nov. 14 story in The Wall Street Journal raised concerns about CAT’s functionality, including the ability of the huge database to handle the volume of data and the contractor’s ability “to stitch together” all of the orders across the marketplace.

In “Stock-Market Supercomputer to Launch with Glitches ” the WSJ said that CAT was going to launch the next day with reporting from exchange, “but with less functionality than previously anticipated, including limits on how many people can search it.” Another issue is that not as many users, including regulators, will be able to search the database due to the high volume of data which is too much for the structure of the database,” wrote the Journal.

The SEC ordered the creation of an audit trail system in 2012 after it took the SEC several months to access the data it needed to analyze the sudden decline in U.S. stocks that occurred on May 20, 2010, known as the “flash crash.”

“It sounds like they still have work to do which is disappointing eight years out,” commented Joseph Saluzzi, partner and co-head of equity trading at Themis Trading LLC in Chatham, NJ.  “That’s unacceptable when we have a market structure with 13 stock exchanges, when we had a flash crash and you can’t get to the data quickly,” said Saluzzi.

In 2012, the SEC finalized Reg NMS Rule 613 ordering all of the exchanges and FINRA to develop a consolidated audit trail that would collect order, quote and trade data across equities and options into a single database.

One of the main purposes of building CAT is to help the SEC and FINRA surveil the markets and detect manipulative trading activity across the fast, complex and fragmented market structure.

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