What the SEC’s Consolidated Audit Trail (CAT) Means for Small to Mid-Size Broker Dealers

The Securities and Exchange Commission’s journey toward establishing a consolidated audit trail (CAT) is four years in the making, and the regulatory body is waiting for public comment after submitting the project proposal last month.

The SEC’s goals of a consolidated audit trail are to help market regulators better understand incidents such as the 2010 Flash Crash by expediting capital markets surveillance. The consolidated trail may even level the playing field between trading organizations.

Despite the recent progress in CAT rulemaking via the proposal, the full blown adoption of a centralized system is still a long way off. Per the SEC’s latest plan, U.S. exchanges would not begin reporting trade data to a consolidated system until late 2017. Large broker dealers have until 2018 to start reporting, and smaller firms until 2019. However, this timeframe is a rough estimate that doesn’t account for delays in approval or the selection of a vendor to build and maintain the technology. It’s likely the rollout will be longer term.

But for now, broker dealers will have to revamp reporting operations to prepare for the new wave of transparency that will come with the CAT.

Regulators will have access to the full lifecycle of every order through the CAT. But in order to make this a reality, the data that feeds the consolidated trail will need to be thorough and comprehensive. Based on the SEC’s proposal, firms will need to collect and organize a wide range of data, including the date and time of order events, and various order terms, like price and order type.

Many broker-dealer leaders have prioritized business growth, due to the highly competitive and shifting landscape in recent years, rather than optimizing data practices. But with the impending adoption of the CAT and its stiff data requirements, smaller firms are forced to clean up their data management practices. While manual recording processes already leave firms vulnerable to inefficiency, the CAT will make manual data operations obsolete.

However, the implications of the consolidated audit trail go beyond data management. With trade information filtering into a unified market repository, regulators will have more transparency than ever into firm trading activity. The CAT puts regulators in a better position to detect rogue activity and pursue noncompliant broker dealers faster, leaving firms more vulnerable to fines and penalties.

While the exact timeframe for the CAT’s rollout is still unclear, broker dealers need to prepare for a full adoption. Gathering and organization accurate firm data will ensure a smooth transition to the CAT once its adoption is underway.