The US SEC has approved an amendment to the National Market System Plan (NMS Plan) governing the Consolidated Audit Trail, or CAT, to adopt a revised funding model, called the Executed Share Model.
The SEC’s plan also establishes a schedule for CAT fees for the self-regulatory organizations that participate in the CAT NMS Plan in accordance with the new model.
The amendment became effective upon the commission’s approval, but industry groups have sharply criticized the plan, calling it unfair to broker-dealers. Two SEC commissioners dissented, citing the steeps costs to the industry, which they believe will inevitably be borne by investors.
The CAT repository
CAT is a central repository of trades, quotes and orders for all US exchange-listed and over-the-counter equity securities and US exchange-listed options contracts across all US markets and trading venues.
Right after the flash crash of 2010, market regulators thought about how they did not have one reliable source of readily available consolidated order data. The agency proposed Rule 613, which was adopted in 2012. In 2016, the Commission approved the self-regulatory organizations’ (SROs) proposed NMS plan creating the CAT.
The SEC has “not appropriately addressed issues regarding personally-identifiable information and the protection of CAT from a cybersecurity perspective”.
Mark Uyeda, SEC Commissioner
Referring to Rule 613, SEC Chair Mary Schapiro said at the time: “A consolidated audit trail that accurately tracks orders throughout their lifecycle and identifies the broker-dealers handling them will provide FINRA, other SROs, and us with an unprecedented ability to effectively oversee the markets we regulate.”
In a statement Wednesday about the amendments, SEC Chair Gary Gensler pointed out that market regulators have already benefitted from CAT in surveillance and enforcement work, saying: “CAT data was beneficial for our staff’s GameStop report from 2021, for our analysis of insider trading, as well as for a number of the Commission’s proposed rulemakings.”
The amendments unveiled on Wednesday modify the method by which the costs associated with building and operating the CAT are allocated among the SROs and their industry members.
The CAT costs
The SRO amendments will change the 2016 CAT funding structure in two ways. First, the fees participants pay to fund CAT will be determined by executed shares. Previously, the funding amount was determined by different factors. Venues like exchanges and alternative trading systems paid according to their market share, and industry members like broker-dealers paid according to their message traffic.
Second, the fees will be divided evenly into thirds across three parties: the SROs, executing brokers representing buyers, and executing brokers representing sellers. Previously, allocation was not specified between venues and broker-dealers.
“CAT data was beneficial for our staff’s GameStop report from 2021, for our analysis of insider trading, as well as for a number of the Commission’s proposed rulemakings.”
Gary Gensler, SEC Chair
Commissioner Mark Uyeda said in a dissenting statement that CAT’s “ballooning expenses” should have been addressed before this amendment’s fee allocation was approved. And he said the SEC has “not appropriately addressed issues regarding personally-identifiable information and the protection of CAT from a cybersecurity perspective.”
Commissioner Hester Peirce said that the allocation of fees under the amendments will only widen what she calls “the misalignment of incentives under the plan to control costs”.
She added: “It ensures that most, if not all, of the CAT’s costs are borne by parties that have little or no influence over how the CAT is implemented or how its requirements are interpreted or applied.” Although the plan does not directly allocate costs to investors, investors will bear the brunt of the financial and non-financial costs of it, she said.