CAT would work best if SROs participate

Regulators at the government and SRO levels are under lots of pressure to create a market structure that will allow for the benefits of modern trading, while curbing some of the potential excesses.

We’ve seen several strong moves to date, including the crackdown on naked sponsored access, the move to set up and single stock circuit breakers and the coming price bands, and even the ban on flash quotes. Some big ideas remain on the table, such as the trade at rule. But perhaps the most ambitious idea is the Consolidated Audit Trail, which would be nothing short of revolutionary in terms of functionality, though there have been some precursors, such as the large trader reporting rule (which has yet to go into effect).

Reuters notes that, “There are questions over who will pay the SEC's estimated $4 billion price tag for the audit trail and whether to build it from scratch. Yet it is possible that an SEC-controlled system could sideline the exchanges from investigations into future malfunctions, and strip them of some oversight responsibility.”

This would be unwise as the SROs remain quite sophisticated in their approach to surveillance and other issues. The best option would be for the SROs and the SEC to cooperate on the CAT, leaning more heavily on the SROs.

One Financial Times reader opines: “While Mary Schapiro, chairman of the SEC, lobbies for a supercomputer database of her own, called the consolidated audit trail, absolutely no one outside of Washington believes she can build it--even she doesn’t believe she can build it for anything less than several billion dollars--and no one believes the SEC has the talent to use it.”

That’s harsh. And unfair. But it would nevertheless be wise to make sure the SROs have a hand in the creation and maintenance of CAT.

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