The Securities and Exchange Commission's journey toward establishing a consolidated audit trail, or CAT, has been mired in debate and delays. In late April -- almost four years after the SEC voted to create a market-wide system for tracking equity and options trades -- capital markets firms finally got a glimpse at how the CAT will operate, and how their compliance requirements will evolve because of it.
Today, the goals of the consolidated audit trail remain the same: to help market regulators better understand incidents such as the 2010 Flash Crash; to expedite the surveillance process to prevent manipulative practices; and to potentially level the playing field between trading organizations. The SEC's most recent announcement offers more detail into how broker-dealers will cooperate with the CAT, including new data-reporting and clock-synchronization guidelines.
Despite recent progress in CAT rulemaking, a fully baked, centralized trail is still years away. But in the interim, as capital markets authorities explore ways to ensure the efficacy of a CAT system, broker-dealers have to reengineer their operations for a more transparent world.
CAT Inspires More Questions Than Answers
According to the SEC's latest proposal, U.S. exchanges would not begin reporting trade data to a consolidated system until the end of 2017. Large broker-dealers would have until 2018 to start reporting, and smaller firms until 2019. This timing, of course, is contingent on any hiccups that may interfere with the plan's approval, or the selection of a vendor to build and maintain the technology.
Already, broker-dealer executives have voiced concern about the time and financial investment needed to adapt their existing systems in order to capture information for the audit trail. Even the Securities Industry and Financial Markets Association publicly questioned the mandate for brokerages to synchronize their clocks within 50 milliseconds of federal standards, suggesting that such a wide reporting gap isn't enough to match the speed of high-frequency trading.
Some critics speculate that by the time a consolidated audit trail is available, the infrastructure will be outdated (or close to it.) As industry stakeholders share their qualms about an expensive, error-prone shift to CAT, blockchain technology increasingly seems like a viable solution. On one hand, blockchain's vast storage capacity would eliminate the need for massive servers and complex data entry. However, the legwork needed to develop industry usage standards around the distributed ledger system could derail the timing of CAT adoption.