By Jim Toes, STA President and CEO
Paul Atkins will soon testify before the Senate Banking Committee for his potential SEC Chair nomination, with no set date. In addition to facing questions on his regulatory philosophy, enforcement priorities, and the SEC’s mandate to protect investors, ensure fair markets, and support capital formation, Atkins will face more specific inquiries.
In this fourth of a multi-part series about the topics Mr. Atkins will most likely face, we highlight the evolution of the Consolidated Audit Trail, (“CAT”), a behemoth of a project spawned under a Regulation NMS Plan which has taken on its own life.
Backstory
CAT was conceived in the aftermath of the “Flash Crash” of May 6, 2010. This event saw a rapid, trillion-dollar drop in U.S. equity markets within minutes, followed by a swift recovery. The speed of modern trading across fragmented markets made it extremely challenging for the Securities and Exchange Commission to piece together what had occurred. This incident underscored the need for a more robust, centralized system to track and analyze market activity across different exchanges and trading venues, leading to the SEC’s proposal of Rule 613 in 2010.
It would take another eight years before the new surveillance entity, Consolidated Audit Trail, LLC would process its first trade report on November 15, 2018.
The primary function of CAT is to provide a comprehensive, centralized repository for tracking all trading activity in U.S. markets for National Market System (NMS) securities, which includes equities and options. CAT’s intentions are to enhance regulatory oversight and improve market surveillance, as well as to reduce the burden of data collection by streamlining the process for broker-dealers and exchanges by reducing the need for multiple, disparate reporting systems.
Despite its noble objectives, the CAT has experienced multiple delays, cost overruns, and several controversies, with issues ranging from technical challenges to governance and operational concerns. The complexity of integrating data from a diverse array of market participants has proven more challenging than anticipated. Expenses for the industry have been higher than originally projected. Market participants have also questioned whether CAT’s data will be effectively used by regulators or if it represents an overreach, potentially stifling innovation or adding unnecessary layers of bureaucracy to trading activities.
Reporting Requirements and Their Effect on Costs
The CAT data warehouse is the largest financial regulatory database in existence, with a scale speculated to rival the NSA’s data storage capabilities. This year, CAT-reportable events have averaged 50 billion per day, with regular spikes reaching up to 65 billion—far surpassing initial estimates. While this surge partly stems from growth in equity and options exchanges and overall trading volumes, the primary driver is the SEC’s increasingly aggressive interpretation of what must be reported to achieve CAT’s objectives. Over the past five years, the SEC has adopted a stringent stance on defining CAT-reportable events and the scope of required information.
Revisit What Needs to Be Reported and How Quickly
The SEC is obligated to conduct cost-benefit analysis when issuing rules. However, the scope of CAT-reportable information has grown due to new interpretations of reporting requirements, often emerging without adequate cost-benefit analysis.
Recently, the industry welcomed the SEC’s exemptive order on February 10, 2025, which exempted firms from reporting certain personally identifiable information (PII) of investors to CAT. The SEC noted in its order that such data is ‘not necessary to achieve CAT’s objectives.’ This prompts a broader question: what other data might also be extraneous? One area ripe for consideration is verbal quotes provided by market makers on exchanges, trading floors, or over the phone. While this activity received a temporary exemption on July 28, 2023, that relief is slated to expire on July 31, 2026.
There are other temporary exemptive relief orders that are repeatedly extended for various reasons, primarily the requirements are so burdensome that no viable technological solution exists.
Quote updates by options market makers across more than 1 million strike series represent another area that warrants review from a cost–benefit perspective.
The cost-benefit analysis of reportable events should also consider required reporting timelines. Since enforcement isn’t conducted in real-time, why must quote information—valuable for detecting layering or spoofing—be reported by exchanges at or near real-time? Delaying this reporting by a few hours could generate substantial cost savings without undermining CAT’s effectiveness.
Balancing regulatory oversight, market efficiency, investor privacy, and cost management should be a top priority for any SEC Chair. As Mr. Atkins prepares to face the Senate Banking Committee, CAT stands as a critical yet contentious piece of his potential SEC tenure. CAT’s sprawling scope, escalating costs, and questionable necessity of certain data requirements—like verbal quotes and short reporting timelines — need to be revisited to refine it into a practical tool for market integrity.
