SEC Shakes Up Payments for Trade-Tracking System

“When the Flash Crash occurred, it was a challenge for this commission and its hardworking staff to know what had happened,” said SEC Chair Gary Gensler at the Wednesday morning meeting. It took months to finish a forensic reconstruction of those few minutes of trading, he recalled.

So in 2012, the SEC called for an audit system that could track each stock market order throughout its life cycle. Self-regulatory groups like the stock exchanges and the Financial Industry Regulatory Authority began building the CAT system after its approval in 2016. It allows them—and the SEC—to trace every order for a nationally-traded stock from origination through modifications, routing, and execution.

Gensler said the SEC has already used the CAT system in insider-trading cases and the agency’s report on the GameStop (ticker: GME) trading frenzy of January 2021.

Some features of the CAT system aren’t expected to be complete until 2024, and its cost is proving bigger than anticipated. Annual operating costs were originally estimated to be around $50 million, said Commissioner Hester Peirce at Wednesday’s meeting. The latest budget exceeds $200 million.

Funding has been borne by the securities industry: The SEC uses it free. Wall Street isn’t happy to be footing the bill.

Fees for the CAT were originally assessed according to estimates of each organization’s market share. The new funding scheme approved Wednesday will allocate costs based on executed trades in stocks and listed options. Fees for each trade will be apportioned by a third among the self-regulatory organizations, the seller’s broker, and the buyer’s broker.

In a statement, Finra said it doesn’t support the new funding model. The group says it will be on the hook for a third of the CAT’s total costs, even though Finra is a not-for-profit association and the only CAT participant that doesn’t operate a market.

The broker-dealer association Sifma also panned the new arrangement, claiming that its members will end up paying 80% of costs, counting their contributions to Finra. “Rising CAT costs,” said Sifma CEO Kenneth Bentsen, Jr., “need to be addressed.”

Peirce and her Republican colleague Mark Uyeda voted against the fee amendment, objecting that the CAT system is costing more than five times the original plan and could soon surpass the SEC’s own budget.

“I definitely understand your concerns about the costs,” said Gensler, as his vote carried the new fees, along with Democrat commissioners Caroline Crenshaw and Jaime Lizárraga.

Write to Bill Alpert at [email protected]