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Wall Street Battles SEC's CAT Amid Privacy, Cost Concerns

Wall Street challenges SEC's CAT, aiming to collect 500 billion trading records daily, citing privacy and overreach concerns.

By Mackenzie Crow

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5/2, 06:45 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Goldman Sachs Group, Inc.
Robinhood Markets, Inc.
JP Morgan Chase & Co.
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Key Takeaway

  • Wall Street, led by Citadel Securities, is challenging the SEC's Consolidated Audit Trail (CAT), fearing enhanced trading surveillance.
  • The CAT aims to collect nearly 500 billion US trading records daily by May 31, significantly aiding the SEC in spotting misconduct.
  • Legal and political battles intensify as the industry opposes CAT's costs and potential privacy impacts, despite its proven utility in enforcement.

CAT Sparks Wall Street Backlash

The Securities and Exchange Commission (SEC) is on the brink of fully implementing the Consolidated Audit Trail (CAT), a surveillance tool designed to revolutionize the monitoring of trading activity and identify potential misconduct. This initiative, brewing for 14 years, aims to collect up to 500 billion trading records daily by its May 31 industry compliance deadline. However, Wall Street, led by Citadel Securities, is making a concerted effort to halt the CAT, framing it as an invasive surveillance system. Citadel Securities, alongside other major financial entities from Goldman Sachs to Robinhood, has filed a suit to declare the CAT illegal, citing concerns over privacy and governmental overreach.

Legal and Political Challenges

The legal battle against the CAT has garnered support from various trade associations and has become a focal point for Republicans in Congress, who argue that the project's scope and implications for privacy should be a matter for legislative decision. The SEC, defending the CAT, dismisses these challenges as "meritless," emphasizing the database's role in modernizing oversight in an era of rapid and automated trading. The agency assures that personal data protections are in place, countering claims of unwarranted intrusion into Americans' financial lives.

Enforcement Potential and Industry Concerns

The CAT's potential to enhance the SEC's enforcement capabilities is evident from its role in uncovering significant front-running schemes, such as the case involving Nuveen trader Lawrence Billimek. This instance showcased the CAT's ability to analyze vast amounts of trading data, leading to successful prosecution of complex insider trading activities. Despite these successes, the financial industry's opposition is partly fueled by the cost implications of the CAT, with broker-dealers facing billions in fees, and concerns over the SEC's expanded capacity to scrutinize trading activities closely.

JPMorgan's Surveillance Settlements

In a related development, JPMorgan Chase & Co. expects to pay $100 million to settle an inquiry by the Commodity Futures Trading Commission (CFTC) over trade-surveillance deficiencies. This settlement is part of a broader series of regulatory actions that have seen the bank agree to pay a total of $448 million over failures in its trade-surveillance program. These cases highlight ongoing issues with trade surveillance and monitoring within major financial institutions, underscoring the importance of robust regulatory tools like the CAT.

Street Views

  • Dennis Kelleher, Better Markets (Neutral on the CAT's impact):

    "Before the CAT, it was literally like the SEC was in the horse-and-buggy era of the 19th century trying to catch the fastest race car drivers of the 21st century. I mean, it just wasn’t a fair fight. This changes all of that."