Secretive process for US stock audit trail raises hackles
NEW YORK - The bidding process to build a mammoth system to track trading activity across the U.S. stock market is going through growing pains, with some participants grousing at a secretive process that excludes key groups, including brokerages.
Last week, an advisory committee comprised of several trade organizations and a dozen brokerages for the “consolidated audit trail” (CAT) system were asked to sign non-disclosure agreements, according to half a dozen sources familiar with the CAT.
The agreements aim to foster a more open discussion of how to build and manage the CAT. Several bidders requested the NDAs so the bidding groups could freely provide information about their proposals for what has been described as the country's second-largest database after the U.S. National Security Agency.
But the NDAs have sent a chill through members of the advisory committee. Some questioned their scope during a conference call on May 21 and the need to sign a document whose existence has been known since at least January 2013.
The NDAs have exposed a long-simmering fight between the exchanges, which will decide the winning the bidder, and a brokerage industry that has no vote in selecting a winning bid and has long complained that the process is not transparent.
"I just don't think this is going to work. It's complicated. Anyone who signs an NDA takes on risk for their firm, and I'm not sure what you're going to get in return for that risk," said a person familiar with last week's call.
The CAT is overseen by all the U.S. stock and options exchanges, along with the watchdog Financial Industry Regulatory Authority, which are known as "self-regulating organizations," or SROs.
A source with the exchanges acknowledged the NDAs had created a balancing act for the SROs to be able to talk about the bids in a manner that does not infringe on confidentiality.
But others are more cynical. One source said the NDAs mostly protect the details of a highly conflicted selection process from emerging for public scrutiny.
CAT bidders were advised of possible NDAs in a January 2013 informational document and again this March in written responses to queries about the bidding. They were told then not to disclose anything defined as "SRO Confidential Information in the Mutual Confidentiality and Non-Disclosure Agreement."
What the NDAs spell out is not clear. But their role in the CAT process aggravates a series of issues that theSecurities Industry and Financial Markets Association (SIFMA), which represents hundreds of broker-dealers, has had with the SROs.
SIFMA has complained in the past about being excluded from having a say in exchange-run security information processors, or SIPs, one of which was at the center of a 2013 outage that shut down trading in Nasdaq stocks for three hours. They also believe they should see more revenue from market data, as most of the nearly $400 million in revenue a year goes to the SROs.
SIFMA has urged a more transparent bidding process, warned funding for the CAT should not fall solely on brokers and that the SROs widen the group of decision-makers.
"We'd rather not see the type of governance structure that we've seen with the SIP, where you have the SROs sitting on an operating committee and you have an advisory committee that's brought in from time to time, but all the real business is done in executive session," said T.R. Lazo, associate general counsel at SIFMA.