CAT on a Hot Tin Roof

Good afternoon. Stephanie [Dumont], thank you for that kind introduction. It's good to be with this esteemed group of global regulators. Many of you have come from far and wide, and I welcome you to our Nation's capital. The Intermarket Surveillance Group plays an important role in protecting investors throughout the world. Thank you for the opportunity to participate in your annual conference today.

Please note that I speak today in my official capacity as the Commission's Director of the Division of Trading and Markets. My remarks do not necessarily reflect the views of the Commission, the Commissioners, or members of the Division's staff.

John Shad was the twenty-second SEC Chairman. Chairman Shad served from May 1981 to June 1987, achieving the second-longest tenure as Chairman in Commission history. A successful Wall Street executive before his public service, he is perhaps best known for the Shad-Johnson Accord of December 1981, which resolved several important jurisdictional conflicts between the SEC and CFTC.

But Chairman Shad had investor protection chops as well. In an interview with the New York Times, he warned those guilty of insider trading that "[w]e're going to come down with hobnail boots to give some shocking examples to inhibit the activity."[1] Emerging technologies offered new possibilities. The Commission under Chairman Shad launched EDGAR, our corporate disclosure database today, as a pilot system in 1984.[2] And early in his tenure, Chairman Shad made an important decision that gave your organization its foundational purpose.

In August 1978, the Commission had initiated a project to explore creation of the Market Oversight and Surveillance System, or "MOSS." The project began with a study, which concluded that "in view of significant developments in the complexity, structure, and trading volume in the securities markets . . . the Commission must improve its oversight and surveillance capabilities."[3] In October 1980, Congress authorized three years of funding for MOSS, directing the Commission to report back on progress every six months. The Commission launched a pilot, which grew to cover 670 stocks and 20 option classes, using 13 surveillance algorithms, by February 1981. Our Division was known as "Market Regulation" at the time, and Director Douglass Scarff worked with the exchanges and the NASD - FINRA's predecessor - on data collection.

In early 1981, a task force of exchanges and the SIA - SIFMA's predecessor - was formed, called the "Intermarket Surveillance Group." In August 1981, ISG proposed to the Commission that it take responsibility for the MOSS project. After thorough review of the Commission's progress and prospects, and consideration of the merits of self-regulation, Chairman Shad agreed.[4] In a speech to NSTA - STA's predecessor - in October 1983, he reported that "the stock exchanges and the NASD are enhancing their electronic inter-market surveillance systems and transaction audit trails. These measures facilitate the quick identification of market manipulation and insider trading."[5] MOSS was set aside, and your organization was on its way.

By today's standards, the MOSS project seems quaint. The Commission spent $1.76 million on MOSS in FY 1981. Certain data was only retained for sixty days. Data from NSCC and OCC was sent daily to Washington via commercial courier. Other challenges portended future problems. Vendors with requisite expertise proved difficult to find.[6]

Fast forward to 2010. In the wake of the "Flash Crash" on May 6, the Commission determined that the fully-electronic, widely-dispersed equity market structure required a comprehensive, cross-market audit trail.To this end, the Commission proposed the Consolidated Audit Trail, or "CAT," later that month.[7] CAT was approved in July 2012.[8] Since that time, CAT's story contains all the drama of a Tennessee Williams play. Both private and public sectors have played a part in that drama.

The National Market System Plan to govern CAT was not approved until November 2016.[9] After a change in the Processor, broker-dealers finally were able to report to the CAT in 2020.[10] Challenges have plagued the project from the outset. As Chairman Atkins noted last fall:

"Over time, the costs of operating the CAT have ballooned beyond belief. When the CAT was established, in November 2016, its ongoing annual costs were estimated to total, at the upper end, about $55 million. Unfortunately, even that estimate proved woefully unrealistic, and costs have regularly increased. As of November 2024, annual CAT costs were projected to exceed $248 million. Ultimately, these costs make participating in our equities and options markets more expensive."[11]

And yet the fundamental purpose of CAT remains relevant-and the great promise of the idea that underlies it persists. Working together since last summer, the Commission and self-regulatory organizations have reduced CAT's operating budget by over $100 million, with the prospect of additional savings in the future. On April 16, the Commission issued a concept release on CAT and other audit trails, with comments due June 22.[12] The concept release raises fundamental questions regarding CAT's funding, governance, functionality, and security. Public comment is vital as the Commission determines CAT's future. I hope that many in this expert audience will provide us with input.

In addition to reforms for CAT in the immediate term, the Commission is interested in governance measures to prevent these problems from recurring in the future. The Commission also seeks input on ways to modernize broker-maintained "blue sheets," which contain sensitive client information, as well as a "request-response" mechanism to link this information to CAT's transactional data.

Lastly, as this audience knows well, relevant activity can occur outside traditional equity and options markets. Increasingly, the Commission is aware of novel products that offer exposure to U.S. equities, such as tokenized assets, event contracts, and perpetual futures, often traded on off-shore venues. Investor protection requires integrating any such activity into cross-market surveillance mechanisms, and ISG plays a key role in this regard. The Division stands ready to assist you in meeting your responsibilities.

Thank you for your time and attention. I hope that the conference proves productive and I look forward to your questions.