The SEC team newly appointed by Trump plans to abolish the exchange monitoring system.

Author | Bill Alpert (william.alpert)

Over the past year, the U.S. Securities and Exchange Commission (SEC) has begun to benefit from a trading tracking system that took 15 years and cost $1 billion to build.

However, the new leadership of the SEC is considering abolishing or weakening the system, claiming it is an improper infringement on investor privacy and that the operating costs are too high.

The tool called the "Consolidated Audit Trail" (CAT) provides the SEC with a timestamped record of the entire process for every stock and options order as it flows from brokers to approximately 50 national exchanges and trading pools. It has already helped reveal insider trading and market manipulation schemes that older monitoring systems might have overlooked.

No one likes a "whistleblower," but that's not the main reason why CAT is unpopular on Wall Street. In addition to the costs of development, the securities industry will also bear approximately $250 million in annual operating expenses for CAT.

Currently, the Republican commissioners in charge at the SEC have stated that the CAT contains too much personal information of investors, including names and birth years. Commissioners Hester Peirce and Mark Uyeda remarked last December, "The CAT is a system that one would expect to see in a dystopian surveillance state, rather than a beacon of the free world."

Within weeks after Trump's inauguration, the two commissioners indicated that Wall Street could temporarily refrain from submitting its clients' personal information.

The newly appointed SEC Chairman Paul Atkins may go further. He assisted in drafting the conservative manifesto "Project 2025," which calls for the termination of the CAT system.

Some advocates for investor rights hold a different view. Ben Schiffrin, the securities policy director of the investor rights protection organization "Better Markets," stated: "The purpose of CAT is to make it easier for the SEC to identify and catch those who engage in market disruptions and manipulations. I don't understand why this industry would not welcome CAT."

Back to May 6, 2010, after the "flash crash" (when the Dow Jones Industrial Average plummeted 1,000 points in 10 minutes), there was not much opposition when the SEC began considering the creation of market monitoring tools.

At that time, the SEC spent months figuring out why the stock market plummeted and then rebounded within minutes. The agency's analysts had to piece together trading records from multiple exchanges and those off-exchange "dark pools" that do not report suspicious transactions.

The SEC proposed the establishment of the CAT system in 2012. It aims to track every transaction—from the generation of customer orders, to submission to trading venues, and finally to execution or cancellation, with timestamps recorded throughout the process.

It wasn't until 2016 that the SEC accepted the proposal from various exchanges to establish a system for collecting audit data. The first contractor hired to build and operate this system was dismissed for failing to complete the task on time. In 2019, a new CAT processing organization was formed by 25 exchanges and the self-regulatory organization of the brokerage industry — the Financial Industry Regulatory Authority (Finra).

Even before the CAT had completely collected all the data, the SEC had already credited it with the resolution of several cases. In 2023, an employee of the Teachers Insurance and Annuity Association (TIAA) admitted to engaging in front-running, illegally profiting $47 million by using the company's trading information. Investigators traced his years-long scheme through CAT data.

In November 2024, a Federal Reserve bank examiner admitted to using non-public information from his regulatory oversight of banks to conduct stock and options trading, and has pleaded guilty. In December of the same year, a trader in Florida reached a settlement without admitting to SEC charges, who was accused of manipulating the buy and sell quotes of thinly traded stocks by placing "spoof" orders (false orders that are withdrawn after liquidating previous positions).

CAT is now the largest securities data repository in the world, with one trillion new reportable events flowing in every day.

But its cost far exceeds expectations.

When development began in 2017, Finra estimated the construction cost of CAT to be $37 million, with an annual operating cost of $50 million. However, the development cost has now exceeded $1 billion. It is expected that by 2025, the annual operating cost will approach $250 million—of which 73% will be paid to Amazon.com for cloud hosting—and it continues to grow at a rate of 10% to 15% per year.

"The costs borne by the industry have been rising," said Thomas Jordan, chairman of the CAT Advisory Committee of the Financial Information Forum.

As the cost of audit trails rises, the disputes surrounding bills have also intensified.

The system costs are shared by two parties: brokerage firms and those Wall Street entities with self-regulatory status—namely Finra and the various exchanges. According to the rules agreed upon between the SEC and the self-regulatory organizations, the latter (Finra and the exchanges) can pass on a portion of their burden to the brokers.

Finra has already done this - which makes broker-dealers bear about 80% of the costs of CAT. If other exchanges follow suit, this proportion could rise to 100%.

About half of the trades are executed by over-the-counter dealers such as Virtu Financial and Citadel Securities, founded by billionaire Ken Griffin. In the face of the tidal wave of CAT costs, Citadel has challenged the audit plan in court.

In February of this year, during a hearing at the Eleventh Circuit Court of Appeals in Atlanta, Citadel argued that the SEC illegally concealed the costs of CAT from Congress by making the industry pay for it. The SEC also empowered Citadel's competitors—such as Nasdaq and Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange—to pass the costs onto Citadel.

Currently, CAT fees are approximately equivalent to charging 2 cents per transaction for every 1,000 shares. Of course, ultimately almost all costs may be passed on to investors.

"The SEC has created an unprecedented and massive surveillance tool that tracks every investor and every transaction from start to finish," said Noel Francisco, a lawyer at Jones Day representing Citadel. "All the funding comes from the 'tax' imposed on every transaction within the United States."

The SEC's lawyer told the judge that the agency has had the power to investigate stock trading since its establishment after the stock market crash of 1929.

Both the SEC and Citadel declined to comment.

However, outside the courtroom, the newly formed Republican majority in the SEC has begun to back down on the issue of the audit tracking system. Days after the court hearing, the SEC waived the requirement for the industry to submit the names, addresses, and birth years of individuals behind the trades. Acting Chair Mark Uyeda stated that using coded identifiers still allows investigators to trace the traders.

At the end of February, a group of Republican senators and representatives wrote to Ueda, asking whether the committee wished to continue defending the audit system in court.

In March, the industry operators of CAT requested the SEC to permanently exempt personal information and allow them to erase the personal information accumulated over the past few years.

The "Better Markets" organization pointed out in a comment letter submitted last Thursday that the proposal would undermine the purpose of CAT and tie the SEC's hands. The organization stated that without personal information, "the SEC will be unable to quickly investigate abusive trading practices and determine accountability."

Jordan, a consultant at the Financial Information Forum, stated that it is actually impossible to completely shut down the CAT project. This is because the industry has already abolished the previous system used to report suspicious transactions to the SEC.

"I believe the CAT project will continue to exist," Jordan said, "but it must operate more efficiently."

New SEC Chairman Paul Atkins is skeptical about the CAT project.

During the confirmation hearing on March 27, he was asked about his opinion on the proposal to terminate the audit project in the "2025 Plan."

Atkins stated: "This plan needs to be reviewed. We need to see if it focuses on addressing the mission it is trying to solve."