Compliance

10:47 AM
Anthony Becker
Anthony Becker
Commentary
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Consolidated Audit Trail: More Than One Way to Skin This CAT

It behooves today's investment firms to be prepared to tackle these new requirements now and in the future.

The Securities Exchange Commission (SEC) voted in July to require exchanges and broker oversight groups to have a single system to monitor and analyze trading activity across U.S. equity and options trading venues. This Consolidated Audit Trail (CAT) will be designed to help enhance the surveillance of the equities markets by establishing a centralized database that can track and store order information throughout its entire lifecycle, every trade order, execution and cancellation.

Why is CAT necessary?

Regulators are currently on a different playing field than market participants, not able to keep up with technology and data improvements in the marketplace. Regulators currently oversee trading activity by observing data collected in various formats from various systems. CAT would provide a centralized data store, capturing all relevant information throughout the lifecycle of a transaction. The CAT system would begin the process of "calling up" the regulators to the major leagues.

CAT has spurred various opinions on the impact and effectiveness of the rule. Proponents of the rule argue that CAT will increase the ability of regulators to monitor the overall market structure, ensuring better understanding of rules and the effect on trading. They believe data will provide better insight into patterns, helping assess the quality and fairness in the markets. Critics of CAT say the SEC has not considered the cost benefit analysis of the rule, in that it will be too costly to implement and not provide any significant benefit to regulators and the marketplace as a whole.

Implementing CAT

A system and data warehouse of the size and scope of CAT is a complex and timely effort. A system will have to provide firms with the data warehouse framework and reporting capabilities to be able to respond to CAT. Ideally, this should include cloud-based surveillance, supervision, and management reporting to provide a complete view of an order's lifecycle, including cancel, routes, updates, and executions. A best-practice CAT system must allow regulators, exchanges and broker-dealers to implement a cost-effective solution in a timely fashion.

For instance, if a broker-dealer seeks to establish a system to capture the elements of CAT in order to display the routing information associated with a specific trade order exception, the firm would need:

- The ability to produce daily reports of every element (for a complete audit trail)

- A complete view of an order's lifecycle

- A system to deliver CAT to the regulators

- A proactive approach

The passage of CAT by the SEC shows once again that firms need to stay diligent and proactive in today's regulatory environment. Firms can no longer be reactive to changes. In fact, SEC Chairman Mary Schapiro said, "A consolidated audit trail will reduce the regulatory data production burdens on SROs and broker-dealers by reducing the number and types of ad hoc requests that regulators submit today."

This is just a first step in a broader change that will affect all market participants; it behooves these various firms to be prepared to tackle these new requirements now and in the future.

Anthony Becker is product manager for SunGard's Valdi Trading Compliance.

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