In 2016, the Securities and Exchange Commission (SEC) embarked on an ambitious endeavor to develop a comprehensive trade-tracking system. However, what was supposed to be a streamlined process turned into a monumental undertaking. The Consolidated Audit Trail (CAT), as it came to be known, was envisioned as a response to the infamous Flash Crash of 2010 when the Dow Jones Industrial Average plummeted by 9% in mere minutes.

The development of the CAT system sought to provide regulators with unprecedented insights into market activity and eliminate the challenges encountered during the aftermath of the Flash Crash. SEC Chair Gary Gensler reflected on this, noting that understanding what had transpired during those pivotal moments took months of meticulous analysis.

The CAT system allows for comprehensive order tracking, including information on modifications, routing, and execution. This groundbreaking development has empowered the SEC and other regulatory bodies to gain valuable insights into trading activities. Notably, the SEC has already utilized the CAT system to investigate insider trading cases and produce a report on the GameStop trading frenzy in January 2021.

In recognition of the tremendous scope and importance of this initiative, the commission recently approved an alternative funding mechanism for the CAT reporting system. The cost of this project has already surpassed $500 million, underscoring its significance within the industry and its potential to revolutionize the way trade data is analyzed and regulated.

Key Takeaways:

  • The SEC has approved a new funding approach for the Consolidated Audit Trail (CAT) system, designed to track every stock market trade.
  • The development of the CAT system was prompted by the Flash Crash of 2010 and the subsequent challenges faced by regulators.
  • The CAT system allows for comprehensive tracking of stock market orders from start to finish, providing valuable insights for regulatory purposes.
  • The system has already been utilized by the SEC in insider trading cases and in the analysis of the GameStop trading frenzy in January 2021.
  • The cost of developing the CAT system has exceeded $500 million, emphasizing its significance and potential impact on the industry.

CAT System Faces Delays and Cost Overruns

The Consolidated Audit Trail (CAT) system, designed to track and store market trading data, is experiencing significant delays and cost overruns. Originally scheduled for completion by 2024, certain features of the CAT system are still unfinished. Furthermore, the project's budget has swelled to over $200 million, far exceeding the initial estimate of $50 million.

Funding for the CAT system has been provided by the securities industry, with no cost to the Securities and Exchange Commission (SEC).

Initially, fees for the CAT were calculated based on market share estimates for each organization. However, a new funding scheme was approved during a recent meeting. Under this scheme, costs will be allocated based on the number of executed trades in stocks and listed options. Each trade will attract a fee that is divided equally among the self-regulatory organizations, the seller's broker, and the buyer's broker.

Despite objections from Commissioner Hester Peirce and her Republican colleague Mark Uyeda, who expressed concerns about the escalating costs of the CAT system and its potential impact on the SEC's budget, the fee amendment was approved. Chairman Gary Gensler acknowledged their concerns but ultimately supported the new fees along with Democrat commissioners Caroline Crenshaw and Jaime Lizárraga.

The CAT system, once completed, aims to enhance market surveillance and facilitate more effective regulation. However, with ongoing delays and increasing expenses, the future of this project remains uncertain.

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