Phil Flood, Chief Commercial Officer at Inforalgo, a Gresham Technologies company, demystifies the Consolidated Audit Trail (CAT) as we approach the first Interfirm Linkage deadline on 26 Oct.
Perhaps the most ambitious reform the US market has ever seen, the CAT is designed to capture order activity for approximately 1800 US broker dealers, exchanges and self-regulated organisations. Not only does the scale of the regulation itself present a challenge, but with an unprecedented volume of reportable transactions in this market everyday (somewhere between 50-80 billion), the CAT is set to create one of the largest databases in the world. Throw in a complicated regulatory timeline spanning three years, a false start from the regulator in 2018, and not forgetting a global pandemic, it’s easy to see why market participants are seeking clarity.
Despite these obstacles, the industry is adapting to this new regulatory landscape, with the initial implementation phases of CAT going well according to the U.S. Securities and Exchange Commission (SEC) earlier this year. Indeed, with an average of over 15 billion Equities trades reported by 1224 firms and 1.4 billion Options by 730 firms daily, initial rejection and lateness rate percentages have all gone down. This demonstrates that the industry has tackled the initial reporting challenge of ingesting large volumes of data from disparate sources and mapping reporting activity to meet the CAT deadlines well.
That being said, those captured by the CAT are still facing a series of significant compliance challenges.
On average, there could be over 32 million initial errors per day just for Equities. Spread that across the total number of firms submitting, and you are handling over 26,000 exceptions on any given day. Factor in a significant increase in volumes due to market volatility (as we saw in March at the beginning of the pandemic, and could well see again as we approach the U.S. presidential election), the number of errors could rapidly escalate, creating a potentially problematic exception management process.
Perhaps the biggest and most complex milestone for CAT to date is Interfirm Linkage. And it’s right on our doorstep. Whilst those CAT savvy industry members amongst you will be aware that this phase was already implemented in production for Equities and Options on 10 August, the impending 26 October compliance go-live deadline now validates that reports representing any Equities orders routed between industry members must be properly linked.
But with just days remaining until the Interfirm Linkage go-live date for Equities, error rates are still high (at around 10-12%), which potentially translates to hundreds of thousands of errors. Not surprisingly, Routed Order ID mismatches are still the largest Interfirm Linkage error we’re seeing, accounting for 56% of all errors. And whilst there are still over two months to go until the Interfirm Linkage go-live date for Options, it’s vital that firms resolve their linkage errors now or face significant operational cost and risk.
Given the volumes of data and error rates being reported, firms are facing very large exception management processes and procedures. In this environment of uncertainty, where resources are under pressure and firms need to be ready to adapt to unexpected events, having to devote significant time and money to managing manual processes is neither desirable nor effective. Even if the error percentages on CAT reporting were to look manageable, the sheer volume of transactions in scope mean that this would quickly get out of hand.
For this reason, ‘making do’ with legacy solutions for CAT reporting is not the answer. Whilst it might be tempting to patch something together which works for now, firms who take this approach are likely to not only find themselves scrambling for a solution once error volumes become unsustainable, but also missing out on the potentially valuable insights that automated solutions can bring.
Having an end-to-end automated process to review these reports, error counts and statistics in real-time not only gives quicker insight into unmatched data, but allows firms to analyse and look for patterns, adapting or inserting transformation rules to improve reporting quality further and drive down the error rate. This creates a ‘virtuous circle’ which should, over time, see firms’ CAT processes becoming steadily more efficient and effective.
As Interfirm Linkage deadlines approach, firms are increasingly concerned about being overwhelmed with data and errors. However by leveraging automation to address these, not only can they manage CAT in a resource efficient manner and have confidence in the veracity of their data, they can also free up their trading teams to take on more complex tasks, leaving them prepared for whatever lies ahead in our newly turbulent environment.
