MJP –
Citadel is now fighting the SEC on the market surveillance system known as CAT, which enables regulators to track trading activity.
Citadel Securities is spearheading an industry pushback against a proposal from exchanges like the New York Stock Exchange and Nasdaq that would require traders to help fund a new market surveillance system, known as the Consolidated Audit Trail (CAT), which has already incurred nearly $1 billion in costs.
Brokers are urging regulators to halt new billing schedules that would mandate their financial contributions to the CAT system, which serves as a comprehensive record of all activity in U.S. equities and options markets—often compared to a “Hubble Telescope” for financial markets.
Until now, exchanges have covered the costs of the CAT.
However, if the U.S. Securities and Exchange Commission (SEC) does not intervene soon, brokers will start receiving bills from the exchanges beginning Tuesday, as the exchanges seek to recover a portion of the promised costs.
The CAT was established after the 2010 flash crash, which made it difficult for investigators to determine the cause of a market drop that erased nearly $1 trillion in value.
The system has been fully operational since 2022, according to the Financial Times.
The SEC directed national exchanges and Finra, which oversees brokers, to create the CAT, with the expectation that the trading industry would eventually bear a significant share of the expenses.
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Last year, the SEC approved a plan requiring broker-dealers to cover two-thirds of the costs, while exchanges would cover the rest.
Initial payment plans were submitted in January but were suspended pending review, which has yet to be completed.
Last month, exchanges and Finra withdrew their initial payment plans and submitted revised ones with minor changes.
Unless the SEC issues another suspension, brokers will receive bills in October based on September’s trading volumes.
Several regulatory filings and letters from industry groups, including Citadel Securities, Virtu Financial, the American Securities Association, and Sifma, have urged the SEC to suspend the billing process.
Citadel Securities, led by Ken Griffin, warned the SEC that it might seek legal action if the billing is not halted by next week.
The company criticized the new filings as an attempt to extract significant amounts from broker-dealers.
Citadel previously challenged the legality of the CAT funding model in a Florida court, in partnership with the ASA.
That case is still ongoing.
Exchange representatives, including those from the NYSE, Nasdaq, and Cboe Global Markets, declined to comment, as did Finra and the SEC.
However, exchange officials noted that they were instructed by the SEC to implement the CAT and that cost-sharing with the industry was always part of the plan.
They argue that increasing trading volumes have contributed to rising costs.
One executive involved in the CAT project stated, “We’re just recovering our costs. There’s no profit here,” emphasizing that the industry had been resistant to funding the system.
Brokers have raised concerns not only about the costs but also about accountability for any costly missteps during the CAT’s development, as well as the system’s annual operating budget, which now nears $200 million—about five times the original estimates from 2016.
In a market where big player such as Citadel have manipulated prices in their favor, reported inaccuracies, and have taken advantage of the industry — opposing any regulatory means that track its trading activity has been part of their mission for years.
