SEC CAT Unleashed

Securities and Exchange Commission, SEC, Consolidated Audit Trail, CAT, FINRA, NASD, Self-Regulatory Organizations, SROs, market misconduct

The CAT System will Monitor Market Misconduct

On November 15, the Securities and Exchange Commission (SEC) approved a new, cutting-edge plan for a single comprehensive database known as the Consolidated Audit Trail (CAT). Under the new system, regulators will be able to more efficiently track all trading activity in the US equity and options markets. Self-Regulatory Organizations (SROs) such as FINRA and NASD, as well as broker-dealers, will be required to record and report information under CAT—including the identity of the customer—resulting in a range of data elements that together will provide a complete lifecycle record of all orders and transactions in the US equity and options markets. It is important that compliance officers become thoroughly familiar with the new system and its requirements.

Market Misconduct Tool

The plan for CAT was submitted jointly to the SEC by the national securities exchanges and FINRA because of the need to improve the effectiveness of market research and monitoring, event reconstruction, and the ability to identify and investigate market misconduct. The SEC made modifications to the original plan in order to strengthen data security requirements—especially with regard to personally identifiable information and tightening synchronization standards for SROs to within 100 microseconds of the time maintained by the National Institute of Standards and Technology. This will enable regulators to better sequence order events across multiple exchanges and enhance CAT plan governance by expanding membership of the advisory committee to include an additional institutional investor representative and a representative of a service bureau that provides CAT reporting services.

Harnessing Twenty-First Century Technology

According to a statement by SEC Chair Mary Jo White: “With the approval and ultimate implementation of CAT, the Commission’s regulatory capacity strongly embraces 21st century technology, enabling the Commission and the SROs to harness data and technology to more effectively oversee market participants. 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.”

Reporting Down to the Millisecond

The CAT plan will require that data be recorded contemporaneously with the order event and reported to a central repository by 8 a.m. ET on the day following the event. The plan also requires that CAT data be time-stamped in increments as granular as those used by the SROs and broker-dealers for their order handling or execution systems, but with a minimum time stamp granularity of one millisecond for all order events, except manual order events and the time of allocations (in which case time stamp granularity must be a minimum of one second).

Replacing Obsolete Systems

Within two months of the approval of CAT, SROs must select a plan processor to build and operate CAT, and SROs will then be required to begin reporting to the CAT system within one year, with large broker-dealers following the next year and small broker-dealers the year after. SROs must also submit proposals for retiring existing regulatory data reporting systems that will be rendered obsolete by CAT in order to reduce the burden on broker-dealers caused by reporting to multiple systems.

After receiving his Juris Doctor degree from The John Marshall Law School in Chicago, Mr. Brochin served as an Administrative Law Judge with the Illinois Department of Labor for six years. Following that position, he was a solo practitioner in the fields of Real Estate Law and Commercial Contracts Transactions for twenty years. In 2003, he was recruited to head an outsource title research company in Israel, and since 2007, he has engaged in litigation support for several high profile cases. He has taught Business Law as a faculty member of the Jerusalem College of Technology, and for the past three years, he has authored a wide variety of legal White Papers and timely legal articles as a professional legal content writer.

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