Even the broker-dealers and exchanges that provide data to CAT will not be able to query the data they submit to the SEC’s consolidated Audit Trail. But for investors, the fact that this data exists and is being collected by broker-dealers has the potential to transform trading strategies. As broker-dealers and other parties become skilled in collecting new levels of detail on the market, investors must demand access to this data as a requirement to doing business.
The CAT is creating a new world of challenges, littered with risk. In mid-July, the Investment Company Institute (ICI) expressed serious concerns to the SEC about the agency’s proposed Consolidated Audit Trail (CAT) of trading data.
If cyber criminals were able to hack their way into the massive CAT database, the investors’ group wrote, they could inflict significant financial harm on investors and the market. In expressing these concerns, the group acknowledged something about the SEC’s CAT that’s becoming increasingly apparent to the market: It will be a goldmine of market information.
“This treasure trove of information has tremendous commercial value,” wrote David Blass, ICI’s general counsel, in the 14-page, July 18 letter. “We are gravely concerned that cybercriminals and others will seek to access and use it for their personal gain to the detriment of funds and their shareholders.”
To be clear, the SEC’s CAT is designed for regulatory use and isn’t intended to be used as a commercial database. In fact, at this point it appears that even the broker-dealers and exchanges that provide data to CAT will not be able to query the data they submit. But for investors, the fact that this data exists and is being collected by broker-dealers with whom they do business has the potential to transform trading strategies.
First conceived in 2010 in response to the “Flash Crash” that year, the CAT is designed to help regulators piece together a snapshot of modern markets, where orders are routed between multiple exchanges that compete with each other and with dark pools in a high-frequency trading environment. Back in 2010, it reportedly took regulators more than four months after the Flash Crash to decipher what happened. The CAT not only will require sub-second time stamps in order to collect a more accurate picture of executed trades, it will capture data on quotes and orders related to a variety of reportable events, including trade executions, cancellations, modifications and routings of orders to other markets.
In total, it’s been estimated CAT will archive 50 billion records daily.
Currently, regulators performing oversight of market activities must compile data from a variety of systems, including FINRA’s OATS system and others, that don’t contain the level of detail, timeliness or completeness to accurately audit transactions, because data might be aggregated, pre-routed and disaggregated through multiple markets. (For how the current plan, according to SIFMA, “would impose the vast majority of CAT-related costs on broker-dealers,” see: “Who Says the CAT Doesn’t Have a ‘Silver Lining?’ ”)
With the CAT, when an order is routed away, the routing firm would have to capture a CAT order ID, the identifier of the firm routing the order, the identifier of the firm to which the order is routed and whether the order is routed internally, and the identifier of the department or desk to which it is routed. But just as CAT receives that data from the routing firm, it will also have to receive similar records from the market participant receiving the order, allowing the system to compare detailed trading records on multiple events in the transaction lifecycle from multiple perspectives.
There’s more, of course. CAT’s sub-second time-stamping requirement, currently set at 50 milliseconds, is slow by the standards of today’s markets. However, requiring sub-second time stamping on a massive scale from participants on multiple sides of transactions in the market will represent a major step forward in accurately auditing market events.
Clearly, time is a critical component of trade information in our markets today, and pairing time with increased detail on transaction lifecycles will further improve the accuracy and completeness of market audits.
Investors will not be able to access CAT data from the regulators; however, once CAT goes into effect, broker-dealers who court investors’ business will, by regulatory mandate, be capturing time-stamped, granular-level details on a range of market events that make up transaction lifecycles. Collecting, sourcing and reporting this data will become activities that broker-dealers and other self-regulatory organizations will, by necessity, become experts in.
Investors can use this data to reverse-engineer trading strategies and see how they were executed in the market. They can gain transparency into trading, execution and broker-routing logic. Once there’s a consistent system for reporting trading detail, it will become easier to find the true nature of an order. Although investors may not have direct control over the micro-trading strategies used to execute their orders, they will be able to use market data to hold their trading partners accountable.
Undoubtedly, data’s no longer a nice-to-have. It’s a necessity. As more market data becomes available, it will become increasingly important for players across the market to use it to remain competitive.
As broker-dealers and other parties become skilled in collecting new levels of detail on the market, investors must demand access to this data as a requirement to doing business.
Then they must learn how to use the data to ask the critical questions of their trading partners.
Welcome to the new world.