Risk & Compliance

SEC Approves New Markets Oversight System

The consolidated audit trail will track the life cycle of every trade in the markets, accounting for billions of transactions, canceled orders and ...
Matthew HellerNovember 16, 2016
SEC Approves New Markets Oversight System

After multiple delays, an effort to improve oversight of U.S. equity and options markets took a major step forward as the U.S. Securities and Exchange Commission approved the $2.4 billion consolidated audit trail (CAT) system.

With Tuesday’s vote, a committee of stock and options exchanges can proceed to choose who will build the CAT, which has been in the works since the “Flash Crash” on May 6, 2010, when the Dow Jones Industrial Average plummeted nearly 1,000 points in a few minutes.

Those bidding for the contract to construct what will amount to an extensive digital warehouse of all stock and options orders include the Financial Industry Regulatory Authority, SunGard Data Systems, and Thesys Technologies.

“Through the CAT, regulators will have more timely access to a comprehensive set of trading data, enabling us to more efficiently and effectively conduct research, reconstruct market events, monitor market behavior, and identify and investigate misconduct,” SEC Chair Mary Jo White said in a news release.

U.S. stock exchanges, FINRA, and the Options Clearing Corporation must begin reporting to the CAT within a year while large broker dealers have two years and small broker dealers have three years.

As The Financial Times reports, the Flash Crash “revealed that authorities had little understanding of the fractured, complex nature of modern markets, where data and trading was executed in fractions of seconds across dozens of venues.”

To address that deficiency, CAT will track the life cycle of every trade in the U.S. market, accounting for billions of transactions, canceled orders and quotes. Unlike other databases maintained by exchanges and regulators, it will include information about the customer behind a trade.

“That means regulators should be able to trace the activity of traders who try to cover up questionable activity by spreading their orders across different brokers,” The Wall Street Journal explained.

However, Lev Bagramian, senior securities policy adviser with the public interest group Better Markets, doubts that CAT will protect investors or prevent market disruption. “That is because it was designed by the very industry it is meant to oversee,” he said.