The Consolidated Audit Trail (Part III): Value Proposition and Hard Decisions

This note is the third of three note series about the Consolidated Audit Trail (CAT).  In our first note, The Consolidated Audit Trail: Reconstructing Humpty Dumpty, we examine the process to date, how the industry arrived at this point, and where the CAT needs to go to be successful.  The second note, The Consolidated Audit Trail (Part II): Problems and Pitfalls, digs deeper into the details and highlights the key pain points that need urgent attention and solutions.

 

Even if we put aside the cost of this effort, the overwhelming complexity of the US markets combined with the integration of approximately 1,800 data providers into the CAT makes it a task of uncompromising difficulty. Consequently, TABB Group believes that it is of utmost importance for the SROs to identify elements within The CAT that are key and choose a processor (the winning bidder) who can deliver against these criteria.  This means that the vendor selection process is critical to the overall success of the program.  They need to find not just a superior technology firm, but one that can transcend both the equity and options market structure and encompass a vast number of desperate sell side institutions, many of whom have never been involved within anything like this in the past. The Consolidated Audit Trail (Part III): Value Proposition and Hard Decisions discusses in detail the key selection criteria that SROs need to consider when selecting a CAT processor.

 

In order to assure success, within the RFP the SROs highlighted the need for vendors to balance both the technical and operational aspects of managing the CAT.  A cursory analysis of the RFP questions indicates that 47% of the questions are focused on technology (a core competency that needs to be fully addressed by all the bidders) and 53% of the questions focus on the actual running of the CAT, including program and project management, commercial terms and organizational setup.

TABB Group categorizes the key criteria for selection into three main groups: technical capacity, operational focus, and fiscal strength and stability. When choosing the CAT processor, the SRO’s should consider who can best deliver against the combined criteria.

 

From TABB Group perspective, there are 10 areas that are critical in selecting a qualified processer and successfully fulfilling the SEC mandate to establish the CAT.  These include:

 

1.Data storage infrastructure

2.Data collection and management

3.Error reporting and corrections

4.Project management experience

5.Security and control

6.B/D network

7.Market knowledge

8.Analytics

9.Vendor risk

10.No broker left behind

 

Normally when developing a program this large and this complex, you have one person or organization who is ultimately responsible for its success or failure.  This does not seem to be the case when it comes to the CAT.  Instead of one person, the SEC has selected a group or competitors to give birth to the largest and most complex repository of capital markets data ever collected.  While it is in everyone’s best interest that the CAT work, the challenges are significant and the risk of failure is real.  At the end of the day, the CAT processor will be responsible for the development and functioning of the CAT, so selecting the most capable bidder will determine the long-term success of CAT.