The Consolidated Audit Trail (CAT) promises to be a revolutionary game-changer for the SEC in detecting, deterring, and punishing market manipulation and predatory behavior.  Done right, its importance for investor protection, market stability and capital formation cannot be overstated.  It will,  finally, move the SEC’s grossly inadequate and outdated market surveillance and enforcement capabilities and technology into the 21^st Century, as we detailed in a comment letter here. 

However, the SEC’s decisions years ago to outsource the construction and operation of this mission-critical technology to the private sector – and put the very market participants it is supposed to police and punish in charge of its governance structure – were grave mistakes that embedded corrosive conflicts of interest into the very core of the CAT.  It is as if a police department contracted with lawbreakers to provide the police with a really effective computer to catch them if they engage in future illegal activities.

The SEC’s proposal to impose transparency and other accountability measures is a good step, but it must do more.  The SEC must also use its full enforcement arsenal against those who have caused the delay, further amend its rules to improve the governance of the CAT NMS and eliminate the conflicts of interest that are killing the CAT, harming investors and endangering the markets.

Getting the CAT done, however, is going to take more than the SEC.  Congress must provide rigorous oversight to ensure accountability and transparency.  A recent hearing on the CAT by the Senate Banking Committee was also a good first step, but it too must do more.  That is why we sent a letter to Committee Chairman Crapo and Ranking Member Brown, who entered our letter into the record for the hearing. 

We applaud SEC Chairman Clayton and the Director of Markets and Trading, in particular, for their efforts to address these failures that they inherited and get the CAT completed as quickly as possible. But they and Congress simply must do more if investors, markets and capital formation are going to be protected and promoted.