Innovations in Trading

The Consolidated Audit Trail National Market System

Defining the challenges

 by Ron D’Vari, CEO, NewOak

Mr. D’Vari is NewOak’s chief executive officer and co-founder. He is responsible for advising NewOak clients in matters throughout the structured products and fixed-income asset lifecycle. In this role, Mr. D’Vari leads the analyses concerning portfolio construction, structuring, securitization, reps and warrants, portfolio management, valuation, credit and market risks and trading management. Mr. D’Vari is a member of NewOak’s executive committee. Reprinted with permission. Visit

Today’s global markets are extremely complex and highly fragmented, with trading across multiple exchanges, asset classes and loosely connected sub-market structures. Additionally, each trading venue has its own ecosystem and trading rules. And existing data collections vary significantly across exchanges and are not integrated. As a result, the overall market is perceived by regulators and investors as something less than transparent.

Recent market dysfunctions, such as the “flash crash”, opaqueness of high-frequency trading and suspected irregularities in the option markets have damaged investor confidence and caused concern among regulators.

In response, the Securities and Exchange Commission (SEC) and self-regulatory organizations (SROs) such as the Financial Industry Regulatory Authority have concluded that they need the ability to proactively monitor and analyze all trading activities that occur within each of the sub-markets, inter-markets, as well as the whole market.

However, given the structural differences among various exchanges, it has been impossible for regulators to collect and merge together large volumes of incongruent data to monitor and analyze overall market activities. Correspondingly, the regulators have not been able to reconstruct past market dysfunctions and examine causes of market volatility and proactively monitor market manipulations and potential insider trading activities by rebuilding transactions over the relevant periods of time.

Enter the CAT

Recent market dysfunctions, such as the “flash crash”, opaqueness of high-frequency trading and suspected irregularities in the option markets have damaged investor confidence and caused concern among regulators

To address this, SEC Rule 613, passed in July 2012, has mandated development of a Consolidated Audit Trail National Market System (CAT NMS) plan by SROs detailing design, implementation and maintenance of a comprehensive audit trail.

The CAT NMS would collect and identify all orders, cancellations, modifications and trade executions in all exchange-listed equities and equity options across all U.S. markets through their entire life cycle. The SROs have been mandated to work with their constituent markets to coordinate development and submittal of an industry-wide CAT NMS plan. SEC Rule 613 will create a whole new standard in U.S. market regulation and lead to the creation of a gigantic central database covering all market participants across multiple asset classes.

The CAT NMS will require thousands of firms and 19 SROs to report all their trading activities in detail. When and if it is successfully developed, the CAT NMS will become the world’s largest data repository of securities transactions, storing over 60 billion data records of customer orders and execution quotes across more than 100 million customer accounts.

The SEC is already contemplating including additional asset classes in the central database beyond exchange-traded equities and options in the future, such as fixed income and primary market transactions. It is estimated that the central database will grow by over 35,000 terabytes (35 petabytes) for each five years of history. The creation of formal governance and functioning structures, decision-making procedures and voting criteria has become critical to the development of the CAT NMS plan.

The SEC will select a single group (CAT processor) via a formal RFP competition to develop the largest and most complex centralized database for U.S. capital markets to date. Data governance, ease of collection, storage, security and overall costs are all of paramount importance. Therefore, significant challenges and risks exist as well. The winning CAT processor will be responsible for the development and functioning of the CAT NMS infrastructure. The long-term success of the CAT NMS will be determined by the core technical competence, operational depth and financial strength and stability of the selected group.