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Massive trading database project should be 'killed,' SEC's Peirce says

A top SEC official wants the CAT "killed."

Known officially as the Consolidated Audit Trail, the massive trading database will use the more than 58 billion records it is expected to receive daily to create an unprecedented view of U.S. stock and option trading for regulators and exchanges.

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SEC Commissioner Hester Peirce has become an outspoken critic of the Consolidated Audit Trail project.
Source: Associated Press

But SEC Commissioner Hester Peirce, a Republican member of the agency's top panel appointed by President Donald Trump, said she is not sure the "liberty cost" of centralizing all that data into the hands of a few governing bodies is worth it.

"I would eliminate [the CAT]," Peirce told reporters on the sidelines of the Security Traders Association's annual conference in Washington. "That would be a more effective way to protect the information. At least then, it's not collected all in one place."

Peirce, as just one member of the SEC's five-person commission, does not have the unilateral authority to end the CAT. Still, her comments come just months ahead of a key April 2020 date when broker/dealers, many of which have expressed concerns of their own about the CAT, will finally begin reporting into the system. The Financial Industry Regulatory Authority and U.S. stock and option exchanges, including those owned by Intercontinental Exchange Inc., Nasdaq Inc. and Cboe Global Markets Inc., began reporting into the CAT in late 2018 after a series of delays derailed the project's original timeline.

Born out of the 2010 flash crash, when stocks plunged dramatically only to rebound soon after, the CAT was first hailed as a regulatory necessity.

The flash crash event sparked questions across the trading landscape, many of which the SEC struggled to answer as it worked its way through a mess of different databases to piece together how the flash crash occurred. The difficulty of that detective work paved the way for the CAT as a solution.

But as the project advanced, Wall Street executives and lawmakers on Capitol Hill have become more vocal about their concerns regarding the system's design. Specifically, they worry about the breadth of information the CAT will hold, which will include a mix of personally identifiable information such as everyday investors' Social Security numbers, and how the system's governing bodies plan to protect that data.

The SEC has been actively working to address many of the concerns around the CAT in recent months. The agency's commission, in a joint written testimony at a recent House Financial Services Committee, said it "shares these concerns and continues to make the protection of CAT data — particularly any form of [personally identifiable information] — a top priority."

Manisha Kimmel, a senior policy adviser for regulatory reporting at the SEC who reports to Chairman Jay Clayton, said at the conference a day before Peirce's remarks that the system's security is top of mind at the agency.

"It's just central to how we think about CAT," Kimmel said.

Kimmel added that she believes the SEC could do its job using the CAT without the inclusion of some of the most sensitive data points, such as investors' Social Security numbers and dates of birth. Those remarks were in response to a recent proposal from the exchanges and FINRA to exclude or mask those data points within the CAT.

While the SEC is "doing a very good job" to protect information within the CAT, Peirce still expressed concern that the system will be too attractive a target for hackers.

"I think it would be even better if we just killed it altogether," the commissioner said.