Dan explains why the industry should look to get the CAT up and running, and quickly, or risk falling into the same trap as it has in the past.
Progress – yes, actual progress – was made with the Consolidated Audit Trail (CAT) earlier this year as self-regulatory organizations (SROs) selected Thesys Technologies, the vendor arm of high-frequency trading firm Tradeworx, as the plan processor responsible for building and maintaining the massive audit trail responsible for tracking and storing information on every order, cancellation, modification and execution for exchange-listed equities and options in the US markets.
There is no doubt that selecting Thesys, which is partnering with IBM, Latham & Watkins, and Rosenblatt Securities on its bid, is a major step forward in the ultimate goal of getting the CAT up and running. However, now is hardly the time for the SROs and the Securities and Exchange Commission (SEC) to pat itself on the back for a job well done, as there is still plenty left to do.
As I covered in my feature, getting to this point with the CAT has been no easy task. Financial technology projects don’t happen overnight, but the lead up to building the CAT has been positively glacial.
I understand that this is a big endeavor, and I can appreciate the SROs and SEC wanting to make sure it was done right the first time, but waiting over four years to simply pick a firm responsible for building the audit trail seems a bit excessive.
You can debate whether the process was impacted by the delay – as some of my sources did in my feature – but there is no denying the change some bidders faced internally between when the initial bids were submitted and when the final decision was made. The three finalists vying to build the CAT all had significant shifts at the C-level or as a company. Further delays while building and implementing the CAT will only lead to more issues.
Granted, the CAT will run as a separate entity from Thesys, and is therefore protected from any volatility the plan processor might suffer. If, for example, Thesys is acquired and the acquiring firm is not interested in running the CAT, a new group can come in and continue to maintain the audit trail.
And while that’s all well and good once the CAT is up and running, that type of transition will be much harder to execute while it’s still being built. By no means am I predicting Thesys’ demise or acquisition, but these are all things that need to be considered when it comes to a project estimated to cost the industry multiples of billions of dollars.
It’s not just a matter of the makeup of a company changing between now and the launching of the CAT. What about the actual technology?
That was a point brought up by one of my sources familiar with the process that I found to be particularly interesting. The source asked what would happen if, for example, transactions were done on the blockchain.
There is a good chance that how the markets operate 10 years from now will look significantly different to how they function today. That’s not some bold prediction; it’s simply playing the odds.
Look at the evolution we’ve seen in technology over the last 10 years. Do you have any reason to believe that trend is slowing down in any way? If anything, it’s increasing in speed significantly – both figuratively and literally.
According to almost all the sources I’ve spoken to, Thesys’ technology is outstanding, and I’m sure they’ve accounted for the fact that the CAT will need to be able to adapt and evolve in the coming years. Thesys’ use of the cloud also offers them the ability to be scalable and flexible.
But it’s easy to see how continued delays could make things difficult. There could be a situation where the SROs begin reporting data to the CAT on time but the broker-dealers, both large and small, push back on their deadlines and delay the process.
The CAT would then sit in a sort of limbo, collecting only some of the data it needs, while the technology in the space continues to evolve around it. It’s one thing to update a system while it’s already up and running, but it’s a completely different task to have to onboard new clients while simultaneously changing the very system they’ve just begun to report into.
All of this is in addition to the fact that the US currently has a sitting president that has voiced his dismay for more regulations in the financial sector. All the more reason why it’s important to get the CAT up and running as soon as possible, as it’s much harder to stop something once it has gotten started.
Adam Sussman joins Anthony Malakian to talk about Liquidnet's acquisition of OTAS, machine learning and AI, and what the buy side wants from analytics platforms.Subscribe to Weekly Wrap emails
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