Author | Bill Alpert

In the past year, the U.S. Securities and Exchange Commission (SEC) fraud investigation has begun to benefit from a 15-year, $1 billion transaction tracking system.

However, the new SEC leadership is considering repealing or weakening the system, saying it is an inappropriate infringement of investor privacy and excessive operating costs.

This tool, called the Consolidated Audit Trail (CAT), can provide the SEC with a full process time stamp record of each stock and option order from brokers to about 50 exchanges and trading pools across the country. It has helped uncover insider trading and market manipulation plans that older surveillance systems may miss.

No one likes "whistleblowers", but that's not the main reason why CAT is unpopular on Wall Street. In addition to paying for development costs, the securities industry will also bear approximately US$250 million in operating expenses per year for CAT.

Republican members currently in power in the SEC said that the CAT contains too much personal information from investors, including names and birth year. "CAT is a system that people would expect to see in dystopian surveillance, not a beacon of the free world," Commissioners Hester Peirce and Mark Uyeda said in December.

World Street could begin not submitting personal information from its customers for the time being.

Recently appointed SEC chairman Paul Atkins may go further. He has helped draft the Conservative Declaration Project 2025, which calls for the end of the CAT system.

Some investors advocate protectors have different opinions. "The purpose of CAT is to make it easier for the SEC to identify and capture criminals who commit market disruptions and manipulation," said Ben Schiffrin, head of securities at Better Markets, an investor's equity protection organization. "I don't understand."Why is CAT not welcome in this industry? ”

Back to the May 6, 2010 "lightning crash" (the day the Dow Jones Industrial Average plummeted 1,000 points in 10 minutes), there was not much objection when the SEC began to consider creating market monitoring tools.

At that time, it took the SEC several months to restore the reason why the stock market plummeted and rebounded in a few minutes. Analysts at the institution had to piece together transaction records from multiple exchanges and those off-market "dark pools" that did not report suspicious transactions.

SEC proposed the establishment of a CAT system in 2012. It hopes to track every transaction—from the generation of a customer order, to the submission to the trading venue, to the final execution or cancellation—and to record the timestamp.

It was not until 2016 that the SEC accepted the proposed plan of each exchange to create a system to collect audit data. The first contractor employed to build and run the system was fired for failing to complete the task on schedule. In 2019, a new CAT processing organization was formed by 25 exchanges and the self-regulatory authority of the brokerage industry, the U.S. Financial Industry Regulatory Agency (Finra), formed.

SEC attributed it to cracking several cases before CAT had even collected all the data. In 2023, an employee of the Teachers' Retirement Foundation (TIAA), a retirement fund management company, admitted to conducting a front-running transaction, using company transaction information to illegally make $47 million. Investigators tracked his years-long plan through CAT data.

In November 2024, a Fed Bank examiner pleaded guilty to using non-public information from his regulatory banks to trade stocks and options. In December of the same year, a Florida trader reached a settlement without admitting the SEC allegations and was accused of manipulating the bid and sale quotes of stocks with scarce volumes by issuing “scam” orders (false statements withdrawn after a previous position cashed out).

CAT is now the world's largest repository of securities data, with one trillion new reported events inflows every day.

But its cost far exceeds expectations.

CAT is now the world's largest repository of securities data, with one trillion new reported events inflows per day.

left;">When development started in 2017, Finra estimated CATThe construction cost is US$37 million and the annual operating cost is US$50 million. However, the development cost has exceeded US$1 billion so far. It is expected that annual operating costs will be close to $250 million by 2025—73% of which are paid to Amazon.com for cloud hosting—and are still growing at a rate of 10% to 15% each year. "The costs borne by this industry have been rising," said Thomas Jordan, the lawyer and chairman of the CAT advisory committee of the Financial Information Forum, the Industry Transaction Data Working Group.

As the cost of audit trails rises, so does the battle over bills.

The system costs are shared by both parties: broker dealers, and those Wall Street entities with self-regulatory status—namely Finra and exchanges. According to the rules agreed by the SEC with self-regulatory authorities, the latter (Finra and the exchange) can pass on the part of its responsibility to the broker.

Finra has done this - which puts brokerage dealers incurring about 80% of the cost of CAT. If exchanges follow suit, this ratio could rise to 100%.

About half of the deals are executed by over-the-counter traders like Virtu Financial and billionaire Ken Griffin. Facing the huge wave of CAT costs, Citadel has challenged the audit plan in court.

In February this year, at the trial of the 11th Circuit Court of Appeals (Atlanta), Citadel argued that the SEC illegally concealed the cost of CAT from Congress by making the industry pay. The SEC also gave Citadel's competitors, such as Nasdaq and the New York Stock Exchange parent Intercontinental Exchange (ICE), the power to pass costs on to Citadel.

Currently, the CAT fee is approximately equivalent to 2 cents per transaction of 1,000 shares. Of course, almost all costs may be passed on to investors in the end.

"SEC has created an unprecedented, massive monitoring tool that tracks every investor and every transaction from start to finish,” said Noel Francisco, attorney for Jones Day, representing Citadel. “All funds come from the ‘tax’ imposed on every transaction in the U.S. ”

SEC lawyers told the judge that the institution had the power to investigate stock trading since its inception after the stock market crash in 1929.

SEC and Citadel declined to comment.

But outside the court, the newly formed Republican majority of the SEC has begun to back off on the issue of audit trail systems. Days after the court hearing, the SEC exempted the industry from the name, address and birth year of the individual behind the transaction. Acting Chairman Mark Uyeda said that the use of coded identifiers still allows investigators to track traders.

There was then in March that the industry operators of CAT requested the SEC to permanently exempt personal information and allow them to clear personal information accumulated over the past few years.

The Better Markets organization noted in a comment letter submitted last Thursday that the proposal would silence the CAT's purpose and shackle the SEC's hands and feet. Without personal information, the organization said that "the SEC will not be able to quickly investigate abuse of transactions and determine the responsible party." ”

Finance Information Forum Advisor Jordan said it was actually impossible to shut down the CAT project completely. This is because the industry has scrapped the system that was previously used to report suspicious transactions to the SEC.

"I think the CAT project will continue to exist," Jordan said, "but it has to run more efficiently. ”

The new SEC chairman Paul Atkins is skeptical of the CAT project.

At the confirmation hearing on March 27, he was asked about the proposal to terminate the audit project on the 2025 Plan.