The Consolidated Audit Trail - 3 Part Series Bundle

To characterize the Consolidated Audit Trail (CAT) as merely a “big” initiative 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 granular level, the day-to-day operations and activities of all of the US equity and US options markets participants.

TABB Group has published a comprehensive three-part research series on the Consolidated Audit Trail (CAT). In this first-of-its-kind research, TABB analyzes the current state of the CAT and the ongoing selection process for a CAT operator. In addition, we examine and highlight the current problems and pitfalls that need immediate attention. This research bundle also digs deeper into the details and proposes criteria to the SROs for selecting a final bidder.

In our first note, “The Consolidated Audit Trail: Reconstructing Humpty Dumpty,” we examine the need for the CAT and analyze the current state of the CAT process. Though initiated by the SEC, the CAT is now in the hands of the SROs. They are in the process of selecting the CAT processor and have downsized the bidding list, and they are finalizing all of the technical details. In July 2014, the SROs announced the final shortlist of CAT bidders. This research describes the process to date, how the industry arrived at this point, and where the CAT needs to go to be successful.

In our second note, “The Consolidated Audit Trail (Part II): Problems and Pitfalls,” TABB Group looks at some of the key aspects and shortcomings of the CAT process and identifies critical elements on which both the industry as a whole and the SROs need to focus to ensure the CAT’s success. Addressing the challenges laid out in this note will be critical as the SROs determine who will take on operation of 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 solution sets exist, and while none of the 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. This TABB research note highlights the key pain points that need urgent attention and the potential solutions.

The third and final note in the series, “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. 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 monumental 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) that can deliver against these criteria. This means that the vendor selection process is critical to the overall success of the program. The SROs need to find not just a superior technology firm, but one that can transcend both the equity and options market structures.

The SROs cannot afford to choose the wrong administrator for this effort, nor can they allow for petty politics or historical preferences to color there decision making. The complexity and dynamic nature of this endeavor makes it imperative that the SRO community work together constructively. The SROs need to select the best bidder from the down-sized group of vendors. That means the one that can deliver the best technical solution as well as the necessary operational, fiscal, and managerial capabilities. For the CAT to be a success, we need all parties involved – including the SEC, the SROs, broker-dealers, and the CAT processor itself – to be in harmony. Most important, SROs need the support of the broker-dealers. For that to occur, they need to address all issues at hand and suggest plans that will alleviate industry concerns.

As part of its research, TABB reached out to 100 industry participants from the capital markets community to collect their sentiment and concerns regarding the CAT. As key questions regarding funding still remain unanswered, this research bundle is a must-read for industry participants – since they will be the ones paying for this massive undertaking.