The Consolidated Audit Trail : What Firms Need to Know

SEC’s Rule 613 of Regulation National Market System (NMS) for the Consolidated Audit Trail (CAT) is an ambitious data management plan for auditing the trading patterns of the entire domestic market. There have been multiple delays in implementation – most recently from the COVID-19 pandemic. But plans are still moving forward for industry members to begin reporting to the CAT. While the exchanges and FINRA have long been preparing the CAT NMS plan, for many broker-dealers, preparations may not be so thorough.  Understanding some key details of the plan is a useful first step to establishing a plan of your own that is compliant and prepared for reporting requirements.

Latest News and Updates on the CAT

• 3/16/2020 – The SEC issues a “no-action” letter, delaying enforcement of data reporting requirements for industry members until May 20, 2020, with further extension possible. The commission cites the effects of the global reaction to COVID-19, and the need for firms to concentrate their efforts on operational readiness.
• 3/17/2020 – In response to concerns about the security of personally identifiable information, the SEC will not require that firms report their clients’ Social Security numbers, dates of birth or account numbers to the CAT. Instead, they will generate a CAT Customer ID number for each client, as well as reporting name, address and year of birth.
• 4/20/2020 – The SEC again delays reporting requirements because of COVID and accepts an expanded phase-in of reporting proposed by participants. The first phase of reporting – equities reporting for large industry members and small industry members who currently report to OATS – must begin by June 22, 2020. The deadline for non-OATS-reporting small broker-dealers remains Dec. 13, 2021.

Timeline of the Consolidated Audit Trail

Pre-2017

• 5/6/2010 – The Flash Crash, a trillion-dollar market crash that rebounded in 36 minutes.
• 6/10/2010 – NYSE begins trialing circuit breakers to temporarily halt trading on stocks that rise or fall by 10% in 5 minutes. In turn, market-wide circuit breakers are introduced to enable cross-market trading halts on severe price declines.
• 5/31/2012 – A Limit Up-Limit Down Mechanism is approved by the SEC, setting price bands that limit volatility within a five-minute trading period.
• 7/11/2012 SEC approves Rule 613 to create and maintain the Consolidated Audit Trail.
• 11/29/2016 – The CAT NMS Plan approved.

2017-2019

• 1/17/2017 – SROs/Participants select Thesys Technologies as CAT Plan Processor to build and maintain the CAT.
• 11/7/2018 – The CAT NMS Operating Committee announces a new reporting timeline (page 4) for broker-dealers starting in November 2019.
• 2/27/2019 – FINRA is chosen as the new CAT Plan Processor, replacing Thesys.
• 3/18/2019 – Industry member CAT registration opens.
• 3/19/2019 – The CAT NMS updates the reporting timeline for large industry members, beginning in April 2020.
• 10/16/2019 – Participants in the CAT NMS Plan request that the SEC exempt the CAT from collecting and storing personally identifiable information such as Social Security numbers and dates of birth.

2020 and Beyond

• 6/22/2020 – New reporting deadline for large industry members and small industry members currently reporting to OATS, starting with equities.
• 7/20/2020 – Initial options reporting for large industry members.
• 12/13/2021 – Deadline for equities and options reporting small industry members.
• 7/11/2022 – Deadline for customer and account reporting for large and small industry members.

History, Purpose, and Progression

The Flash Crash of 2010, made clear to the SEC and the exchanges alike that more failsafes were needed to protect the markets from the spoofing risks of high frequency trading algorithms. Exchanges took their own precautions, such as NYSE’s implementation of circuit breakers to halt trading on any security that rises or falls by more than 10% within 5 minutes. Meanwhile, the SEC acknowledged the challenges of analyzing and auditing cross-market trading behaviors and approved Rule 613 to get the 13 US exchanges and FINRA to develop a Consolidated Audit Trail (CAT).

The goals of the CAT are to track orders throughout their lifecycle and identify the broker-dealers handling them, so regulators can oversee the markets in aggregate. In doing so, the CAT would set a compliance reporting standard to replace the existing reliance on merging disparate data sets. While the exchanges and FINRA, collectively referred to as Self-Regulating Organizations (SROs) or “Participants,” have led the plan development, those responsible for reporting to the CAT extend to any broker-dealer managing the routing of an order. Referred to as “Reportable Events” in the CAT NMS Plan, any event from origination to routing, receipt, modification, and execution will be collected.

Features of the CAT

For any team member of compliance or trade reporting, understanding a high-level view of the CAT plan’s features is key to asking the right questions and planning what internal data is needed. The infrastructure required for CAT will likely add to, rather than replace, existing OATS reporting systems in the short term, and details in timestamping and clock synchronization will set higher standards for broker-dealers’ order management systems (OMS) and execution management systems (EMS).

Comparison to OATS

The infrastructure required for compliance with CAT adds to the existing requirements of the Order Audit Trail System (OATS). While the intention of the CAT is to supersede OATS, this is dependent on all firms reporting to CAT consistently. In the meantime, broker-dealers should anticipate duality in reporting.

The CAT has published a gap analysis identifying reporting discrepancies between itself and OATS. What the analysis notes is new reporting requirements for options, market makers, and customer information with retired reporting requirements of OTC equities. Additionally, the CAT establishes a higher burden for reporting standards, reducing the error correction timeline from five business days to three, and increasing timestamp granularity from seconds to milliseconds. Further, previous exemptions on certain manual orders and exclusions for some reporting member firms will no longer be in scope. The resulting challenges mean a much different data set for broker-dealers to maintain.

CAT Timestamping Specs

The new standards for accuracy and precision with timestamps come from an increased need to understand the behaviors of non-display trading. The timestamps of a firm’s OMS or EMS must be reported in milliseconds (ms) or finer, where the previous standard, as with OATS, was 1 second or finer.

Further, non-manual orders must be synced within 50 ms of the National Institute of Standards and Technology’s (NIST) atomic clock. With this level of granularity, the SEC can better identify a source in the case of spoofing or other adverse trading practices.

What it Means for Trade Reporting and Compliance Teams

The CAT is a long-time-coming reporting mechanism for the SEC to oversee the securities markets more easily but with the tradeoff of broker-dealers’ time and effort to all be on the same page. Understanding what steps need to be taken is an ongoing process among regulators and participants and has led to multiple delays of the CAT’s rollout.

Under the most recent announced deadlines, any industry members who are currently reporting to OATS were required to begin reporting to the CAT on June 22, 2020. Small industry members (those holding less than $500,000 in total capital from the preceding fiscal year and unaffiliated with any larger organizations) who are not currently reporting to OATS must begin reporting to the CAT in December 2021, according to the most recent timeline.

Despite the approved extensions the SEC has allowed for reporting organizations, continuing your organization’s preparations will ensure readiness for compliance when reporting dates finally arrive. Your firm’s compliance and transaction reporting teams should be planning for the data management needs required for collecting and consolidating various data sources. Considering the additional network infrastructure needs and contributing to the data protection conversations still occurring across the industry will help ensure your firm is compliance-ready.

Additionally, partnering firm data with historical SIP market data can support risk monitoring efforts and proactively audit for data discrepancies. Exegy’s Historical Data Services supply this historical data for the CAT, and these on-demand recordings are simultaneously available for any market participant. Having the official CAT recorded market data in your firms’ CAT plan is an invaluable tool. If you’re interested in requesting Exegy’s Historical Data Services, Contact us or call direct at +1 314-218-3600.