The Consolidated Audit Trail (Part II): Problems and Pitfalls

This note is the second in a three-part series about the Consolidated Audit Trail (CAT). In our first note, entitle The Consolidated Audit Trail: Reconstructing Humpty Dumpty we examined the process to date, how the industry arrived at this point, and where the CAT needs to go to be successful. In this vision note - The Consolidated Audit Trail (Part II): Problems and Pitfalls, TABB Group looks at some of the key aspects and shortcomings of the process and identifies critical elements that both the industry as a whole, as well as the SROs need to focus on to ensure the CATs success.

The characterization of the Consolidated Audit Trail (CAT) as merely big is to undersell both the technological and project management challenges that come with building the largest and most complicated data storage project in the history of the US capital markets. Initial estimates indicate that the CAT, when fully operational will house approximately 30 petabytes of sensitive market related data that will enable both the Self Regulating Organizations (SROs) and the market regulators to fully understand, on a microscopic level, the day to day impacts, operations and activities of all of the US equity and US options participants.

The technical challenges associated with compiling and reconstructing this data into a dynamic simulacrum of the US markets is substantial. Few vendors have both the technical expertise to engineer, construct and manage a big data environment as large as the CAT; and have the equities and options market structure expertise to pull off such a formidable challenge. The only thing that may be more difficult than designing, developing and implementing the CAT will be the project and relationship management skills need to get the ~1,800 market participants on board and compliant within Rule 613 timelines.

Successfully accomplishing this, on time and on budget is no small task. Cost estimates for the CAT can range from anywhere from $30 million to build and $30 million per year to run to upwards of a $525 million, all in for the first five years. All of this without any clear understanding of how the community will pay for its construction; and only a few hints on how the CAT will sustain itself financially once it is completed.

TABB Group has identified some of the key concerns and challenges facing the CAT program, including:
• Funding of the CAT
• Sharing & Storing PII
• Implementation Timeline
• Added complexity with new reporters (read options)
• Data governance & Reputational Risk
Addressing the challenges laid out in this note is one of the most pressing issues that the SRO’s need to take into consideration when determine who will take on the CAT. Decisions made now in the CAT process will have long lasting impacts. Questions surrounding funding, storage, security and analytics have yet to be resolved. Multiple solutions sets exist and while none of proposed options are ‘wrong’; some solutions are more ‘right’, especially when taking into consideration the size, scale, scope and complexity of the effort at hand.

For CAT to be a success, we need all parties involved, including SEC, SROs, B/ds and the CAT processor to be in harmony. Most importantly, SROs need the support of the B/ds. For that to occur, they need to address all issues at hand and suggest plans that will alleviate industry concerns. This TABB group focus note digs deeper into the details and highlights the key pain points that need urgent attention and solutions.