AutoCAD the CAT Amid Controversy (by Kelvin To, Data Boiler Technologies)


AutoCAD has been the de-facto computer-aided design (CAD) program for engineers that it’s like an acronym for anything that is professionally engineered, designed and created. In the capital markets, the SEC has adopted rule 613 to establish something called the consolidated audit trail (CAT). It will be the World largest repository to ingest between 30-120 billion trade events from over 2000 sources on daily basis. Would CAT be able to earn the high level of respect as the success of AutoCAD? I have serious doubt about it amid all the controversies, and here is why:

The SEC has no alternative, no money, and no gut!

The SEC will soon approve or reject the CAT National Market System (NMS) plan to build this enormous CAT on November 10, 2016. I don’t see anyone at the SEC would have the gut to turn it down after 6+ years in the working. SEC Chair Mary Jo White doesn’t seem to have a “plan B” to address the Flash Crash if CAT is a no go. They’ve been over promoting that CAT will “significantly increase the ability of industry oversight to conduct research, reconstruct market events, monitor market behavior, and identify and investigate misconduct”. When all hands are on the deck, there’s a danger of overlooking the realities.

The plan in its current form is developed by Self-Regulatory Organizations (SROs) working in conjunction with various committees of industry groups. Realities are:

  • No industry participants like any heightening of oversight by the SEC or other regulators.
  • The SROs, to a large extent, regulate the securities markets as a proxy acting on behalf of the SEC.

Mercy to folks at the SEC that have piles of long overdue pending cases, the agency has long been under-funded by the Federal budget. Without money, the SEC has no alternative, but to rely on these SROs to enforce orders. In fact, SROs need to fight for their own survival too (to allow national exchanges and trading venues to stay afloat). Thus, we have seen a proliferation of order types, different practices of rebates/ commissions, order routing tactics and speed bumps, etc. These “bandages” have added significant complications for the SEC or anyone to manage. SROs and the industry have little incentive to do anything more than the CAT’s requirements, i.e. to submit data into a centralized vault. They aren’t interested in returning powers to the SEC, so the SEC still have the challenges to figure out how to reconstruct market events, analyzed these data, and improved oversights.

Unrelenting focus on Google vs Amazon, lost sense of purpose!

CAT NMS Plan in its current form calls for a T+5 schedule for regulatory access. So regulators aren’t allowed to see the data after 5 days of a flash crash?! That’s ridiculous! The whole concept of requiring everyone to submit data into a centralized vault is flawed and invasive. A single source of truth may never be achieved, as it would take forever to agree on a common standard for data submission. In fact, CAT NMS Plan may have used the FINRA’s OATS as a blueprint when it was developed.

  • FINRA is both an SRO and teamed with Amazon as one of the three final bidders for this CAT project. I am not commenting about any conflict of interest, but the FINRA-Amazon team does appear to be the industry favorite because it involves the least change to their OATS data submission practices.
  • Another widely published bidder is the FISGoogle team. FIS acquired SunGard in 2015 which many broker-dealers use their systems. However, this strength got overshadowed by the flame of Google, or they have put little to no emphasis in their shared CAT documents.

The fight between Google and Amazon has stolen the media’s attention. Many are watching whether the NoSQL camp represented by Google would be competitive with the Amazon’s Cloud solution to modernize FINRA’s OATS structural database. Such unrelenting focus on the two big data giants had caused the plan to lose its sense of purpose. Again, the CAT’s purpose is supposed to be about analytics, reconstruct market events, monitor market behavior, and identify and investigate misconduct.

  • Sadly, many do not even aware there is a third runner – Thesys Technologies, a builder of the SEC’s MIDAS system and an affiliate of High-Frequency Trading (HFT) firm Tradeworx. They appear to have the best sense about flash crash in my humble opinion, and likely to embed an analytical framework in the design of CAT.

Unfortunately, 3rd party runner hardly wins many votes as we can see in the Presidential race. If Dr. Gregg Berman (a former SEC Associate Director, currently worked at another HFT – Citadel) is still with the agency, then I would say Thesys may stay some chance, because he knows their capabilities through the MIDAS project.

The convenience of pointing to cybersecurity and IBG / YBG!

The SEC has solicited public comments about CAT in a 1090 pages document with 456 questions. Many responses are less than 3-5 pages, mostly raising questions on cybersecurity, or desire to retire OATS to avoid costs duplication with CAT. Some SROs seems to be more interested in those governance questions on CAT, and they are against the use of legal entities identifiers (LEIs). Anyway, many difficult and controversial questions around the design of CAT aren’t addressed, except I did contribute to a 43 pages respond.

Instead of requiring submission of data to a centralized vault and afraid of hacking, SEC does have an alternate choice. It is to scrutinize all the order/ execution management systems (OMS/ EMS), and allow real-time analysis directly be conducted at point where data are originated. This type of in-memory/ stream analytic is engineered to catch the rogues by continuously monitoring of their play-by-play actions. Abusive behaviors would be captured and accumulated into stronger warning signals to prompt the necessary close scrutiny without delay. Obviously, this ground breaking approach is very different compared to the current CAT NMS Plan. There are other benefits and better information security protection than moving data in and out of a repository. I can go on and on to explain the details, but I wonder – who at the SEC would have the gut to reject the CAT NMS Plan?

Frankly, our society are filled with I’ll be gone/ you’ll be gone (IBG/ YBG) type of mentality. According to CAT’s implementation timeline:

  • SROs have two months to select one of the remaining Plan Processor bidders to build the central CAT repository once the plan is approved.
  • It will then take 10 months to build CAT and SROs will begin report their data by November 2017.
  • Large broker-dealers will have two years from the plan’s approval to begin reporting data (latest November 2018) and small broker-dealers will have three years (latest November 2019).

Who knows who still will be around to consider the “AutoCAD” engineering approach to market surveillance!

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