Earlier today, the U.S. Securities and Exchange Commission (SEC) pushed back the deadline for the National Market System (NMS) working group to recommend the the appropriate model and provider of the mandated consolidated audit trail (CAT) to 5 December 2013.
If left unchanged the working group would have had less then seven weeks to make its recommendation, which working group officials stated was not feasible given that approximately 31 respondents, which include product and service arms of major exchange operators, large market data aggregators and even Google, may submit their response to the working group’s request for proposal (RFP).
“With this many potential RFPs to read, the decision process is going to get waylaid,” said a self-regulatory organisation (SRO) spokesperson familiar with the situation. “There’s a lot of competing interests here. The final operator of the CAT may not make money for the first couple of years, but being the CAT’s monopoly operator, could be very valuable to someone.”
“The news does come as some relief,” added one market structure executive with a tier-one global bank. “This will give the industry time enough to make sure that we get it correct the first time.”
The lion’s share of trade data
Once completely implemented, regulators expect that CAT platform accurately identify every order cancellation, modification and trade execution for all exchange-listed equities and equity options across US markets, according to working group officials.
The collected data will include any bid or offer order received by an SRO member or originated by that member, the ‘receipt of origination’ of any order routed to another broker-dealer, national securities or foreign exchange, or between desk or department within a broker-dealer. It will also include any modifications, cancellations, executions and a unique customer identification that provides account number, account type, customer type, date of account opening and large trader ID if it is applicable.
“This is the kitchen sink, in terms of data,” says Jim Leman, managing director at industry consultancy Westwater Corp. “Unfortunately in today’s world, it is impossible to reassemble Humpty Dumpty without all of this data. This was proven by the SEC inability to diagnose what happened in the 6 May 2010 ‘flash crash’ for months after the event.”
Much of this can be attributed to the technological limitations of the existing reporting infrastructure like the Order Audit Trail System (OATS) and Electronic Blue Sheet (EBS) systems managed by the Financial Industry Regulatory Authority (FINRA), according to the bank spokesperson. “Those platforms were built in the 1980s and 1990s and cannot keep up with an industry that measures transactions in milliseconds and microseconds. Even now that they have shortened the reporting requirements to the trade reporting facility (TRF) to ten seconds from 30 seconds, it still is an intolerable amount of time.”
Although the NMS working group has not explicitly stated the data collected by the CAT platform will assume the duties of the OATS and EBS platforms eventually, Leman sees it as a logical assumption.
“I hope it will replace those reports, adds the bank spokesperson. “I’m not looking forward to yet another regulatory reporting requirement while the industry pilots CAT. Just in cash equities, we already have the larger trader ID, OATS, EBS, delta-hedging, in concert reporting requirements to name a few. Now we are going to have CAT reporting as well.”
If it does, however, it will be the first signs of mission creep for the overall project, according to Matt Samuelson, principal, capital markets research and consulting at Woodbine Associates. “It is often not possible, at the outset of a project like this to fully envision the full breadth of useful information one might obtain. Accordingly, there is always the chance for selected modifications (or at least requests for modification) in datum, infrastructure, etc. that could potentially help improve the value of the project. The challenge, of course, is that such modifications can add time, cost, and compromise project efficiency.”
The SRO spokesperson estimates that many of the participating SROs will look for ways to generate some sort of revenue from the data to offset the expected development, deployment and operation costs associated with the CAT platform.
“I’ve heard an operational cost of US$3 billion per annum estimate bandied about and amounts like that could have serious impact for all exchanges no matter what their size,” he says. “But it might be a challenge to monetise the data since most SROs offer proprietary data products rather than raw data from across all the markets.
No matter how long the project takes to implement, the changes made along the way or its overall cost, the industry is moving in the right direction, according to the bank spokesperson. “I have an optimistic feeling about this,” she says.