Author |Bill Alpert
Over the past year, the Securities and Exchange Commission's (SEC) fraud investigations have begun to benefit from a trade tracking system that took 15 years and cost $1 billion to build.
However, the SEC's new leadership is considering abolishing or weakening the system, saying it is an undue invasion of investor privacy and too expensive to operate.
The tool, called the Consolidated Audit Trail, or CAT, provides the SEC with a time-stamped record of every stock and options order as it moves from brokers to about 50 exchanges and trading pools across the country. It has helped uncover insider trading and market manipulation schemes that older surveillance systems might have missed.
No one likes a whistleblower, but that’s not the main reason CAT is unpopular on Wall Street. In addition to paying for its development, the securities industry will cover CAT’s operating expenses, which are about $250 million a year.
The Republican commissioners who now hold power at the SEC say CAT includes too much personal information about investors, including names and years of birth. “CAT is a system one would expect to see in a dystopian surveillance state, not a beacon of the free world,” Commissioners Hester Peirce and Mark Uyeda said in December.
Within weeks of Trump’s inauguration, the two commissioners said Wall Street could start withholding its customers’ personal information.
Newly appointed SEC Chairman Paul Atkins, who helped write the conservative manifesto Project 2025, which calls for ending the CAT system, may go further.
Some investor advocates see it differently. “The purpose of CAT is to make it easier for the SEC to identify and catch bad actors who are engaging in market disruption and manipulation,” said Ben Schiffrin, director of securities policy at investor advocacy group Better Markets. “I don’t understand why the industry wouldn’t welcome CAT.” When the SEC began considering creating a market surveillance tool after the May 6, 2010 “flash crash,” when the Dow Jones Industrial Average plunged 1,000 points in 10 minutes, there wasn’t much opposition. It took the SEC months to figure out why the stock market plunged that day and rebounded minutes later. The agency’s analysts had to piece together trading records from multiple exchanges and over-the-counter “dark pools” that don’t report suspicious trades. The SEC proposed the CAT system in 2012. It wanted to track every trade, from the moment a customer order was generated to the moment it was submitted to a trading venue to the moment it was finally executed or canceled, with a timestamp. It wasn’t until 2016 that the SEC accepted the exchanges’ plan to build a system to collect audit data. The first contractor hired to build and run the system was fired for failing to meet deadlines. In 2019, a new CAT processing organization was formed by 25 exchanges and the brokerage industry’s self-regulatory regulator, the Financial Industry Regulatory Authority (Finra). Even before CAT had fully collected all the data, the SEC credited it with several cases. In 2023, an employee of the retirement fund management company TIAA pleaded guilty to front-running, using the company’s trading information to illegally profit $47 million. Investigators tracked his years-long scheme through CAT data.
In November 2024, a Federal Reserve bank examiner pleaded guilty to using nonpublic information about the banks he supervised to trade stocks and options. In December of that year, a Florida trader settled without admitting SEC charges that he manipulated buy and sell quotes in thinly traded stocks by issuing "spoof" orders (false orders that were withdrawn after previous positions were cashed out).
CAT is now the world's largest repository of securities data, with a trillion new reportable events flowing in every day.
But its costs far exceeded expectations. When development began in 2017, Finra estimated that CAT would cost $37 million to build and $50 million a year to operate. Development costs have since topped $1 billion. Annual operating costs are expected to approach $250 million by 2025 — 73% of which goes to Amazon.com for cloud hosting — and are rising 10% to 15% a year. “The costs borne by the industry have been rising,” said Thomas Jordan, a lawyer and chairman of the CAT advisory board of the Financial Information Forum, an industry transaction data working group. As the cost of the audit trail rises, so too has the fight over the bill.
The system’s costs are shared between two parties: broker-dealers, and those Wall Street entities that have self-regulatory status — namely Finra and the exchanges. Under rules agreed upon by the SEC and the self-regulators, the latter can pass on their share to brokers.
Finra has done so — leaving broker-dealers shouldering about 80% of CAT’s costs. That share could rise to 100% if the exchanges follow suit.
About half of the trades are executed by over-the-counter firms like Virtu Financial and Citadel Securities, founded by billionaire Ken Griffin. Faced with a tidal wave of CAT costs, Citadel has challenged the audit program in court.
In a February trial in the U.S. Court of Appeals for the Eleventh Circuit in Atlanta, Citadel argued that the SEC illegally hid CAT’s costs from Congress by making the industry foot the bill. The SEC also gave Citadel’s competitors — such as Nasdaq and Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange — the power to pass on the costs to Citadel.
Currently, CAT fees are roughly equivalent to 2 cents per 1,000 shares traded. Of course, ultimately, almost all of the costs are likely to be passed on to investors.
“The SEC has created an unprecedented, massive surveillance tool that tracks every investor and every trade from beginning to end,” said Noel Francisco, a Jones Day lawyer who represents Citadel. “All of it is funded by a ‘tax’ on every trade in the United States.”
The SEC’s lawyers told the judge that the agency has had the power to investigate stock trades since it was founded in 1929 after the stock market crash.
Both the SEC and Citadel declined to comment.
But outside the courtroom, the SEC’s new Republican majority has begun to back off on the audit trail.
Days after the court hearing, the SEC exempted the industry from the requirement to submit the names, addresses and years of birth of the individuals behind trades. Acting Chairman Mark Uyeda said using coded identifiers would still allow investigators to track traders.
In late February, a group of Republican senators and congressmen wrote to Uyeda asking whether the commission wanted to continue defending the audit system in court.
Then in March, industry operators of the CAT asked the SEC to make the personal information exemption permanent and allow them to purge personal information accumulated over the past few years.
In a comment letter filed last Thursday, the group Better Markets said the proposal would defeat the purpose of the CAT and tie the SEC's hands. Without personal information, the group said, “the SEC will not be able to quickly investigate abusive trading practices and identify responsible parties.”
Finance Information Forum adviser Jordan said it’s virtually impossible to shut down the CAT program entirely. That’s because the industry has already done away with the system it previously used to report suspicious trades to the SEC.
“I think the CAT program will continue,” Jordan said, “but it’s going to have to run more efficiently.”
New SEC Chairman Paul Atkins is skeptical of the CAT program.
At his March 27 confirmation hearing, he was asked about the “2025 Plan” recommendation to end the audit program.
Atkins said: "This plan needs to be reviewed. We need to see whether it is focused on addressing the mission it is trying to address."
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