The SEC’s New Leadership May Abolish the Exchange Surveillance System
According to reports, the new leadership at the U.S. Securities and Exchange Commission (SEC) is seeking to abolish the Consolidated Audit Trail (CAT) system, citing excessive costs and undue infringement on investor privacy. If this move goes forward, it would effectively mark the SEC’s complete withdrawal from monitoring all exchanges.
The CAT system was a massive undertaking — nine years in the making and costing $1 billion. It was conceived in the aftermath of the infamous “Flash Crash” on May 6, 2010, when the Dow Jones Industrial Average plunged 1,000 points in just 10 minutes. The event raised suspicions of market manipulation and pushed the SEC to consider building a comprehensive surveillance tool. Once operational, CAT allowed the SEC to timestamp and track every equity and options order from broker-dealer to execution across nearly 50 U.S. exchanges and dark pools. For years, it has been instrumental in uncovering insider trading and market manipulation that would otherwise have slipped through the cracks of older monitoring systems.
In short, CAT has been the SEC’s most powerful tool for surveillance and fraud investigations. However, it comes at a price — the securities industry shoulders an annual operating cost of roughly $250 million.
An emotionless “informant,” a surveillance mechanism watching every single trader, and a $250 million-a-year money-burning machine — unsurprisingly, aside from regulators themselves, CAT has few fans. Especially not among Wall Street’s traders.
The Core Reason Behind the Proposed Abolition of CAT: Unsustainable Operating Costs
At the heart of the SEC’s potential decision to dismantle the Consolidated Audit Trail (CAT) lies one key issue: exorbitant operational costs.
As the largest securities data repository in the world, CAT processed over 58 billion reportable events per day in 2023. Its annual operating costs are approaching $250 million, and growing at a rate of 10% to 15% per year.
The breakdown of CAT’s annual operational costs falls into four main categories:
Infrastructure and Data Storage Costs (≈73%)
Data Storage: With CAT processing nearly 58 billion transaction records per day (as of 2023), it requires extensive distributed storage systems such as cloud or enterprise data centers.
Computing Resources: Real-time processing and analysis of this data demands high-performance servers, cloud computing services (e.g., AWS, Azure), and streaming technologies like Apache Kafka.
Network Bandwidth: High-frequency trading data must be transmitted in real time from brokers and exchanges to the CAT system, requiring high-bandwidth and low-latency networks.
This category accounts for roughly 73% of total costs — the majority of which are paid to Amazon for cloud hosting services.Data Collection and Processing Costs (≈20%)
Data Standardization: Data from various exchanges and brokers must be cleaned and transformed into a unified format.
Data Validation: Ensures data integrity and accuracy, preventing missing or erroneous entries (e.g., missing orders, incorrect timestamps).
Real-Time Processing: Enables the SEC to monitor anomalies such as flash crashes or manipulative trading behavior in real time.Compliance and Regulatory Costs (≈1%)
Regulatory Reporting: Generates reports for oversight bodies like the SEC and FINRA.
Audit Support: Assists in regulatory reviews and legal investigations.
Privacy Protections: Implements anonymization techniques for sensitive data (e.g., customer identity), ensuring compliance with frameworks like GDPR.Operational and Human Resource Costs (≈6%)
24/7 Monitoring Teams: Including technical operations, security experts, and data analysts.
Third-Party Services: Outsourced components for development or cybersecurity audits.
Training: Onboarding and support for brokers and exchanges using the CAT system.
Cybersecurity: Staff and tools to prevent hacking or unauthorized data access.
Disaster Recovery: Redundant systems and offsite backups to prevent data loss.
Note: The percentage breakdowns are estimates. For precise figures, please refer to the official CAT website.
If the CAT System Is Abolished: Potential Impacts on the Crypto Market
- Potential Disruptions to Traditional Financial Markets
If the Consolidated Audit Trail (CAT) is indeed dismantled, regulators would lose a highly integrated tool for tracking market data. This could severely limit their ability to detect and prevent market manipulation, insider trading, and other forms of misconduct in a timely manner — reintroducing the risk of information asymmetry. Such a move would deal a significant blow to investors who rely on open and transparent market mechanisms.
Regulators like the SEC and FINRA may be forced to return to fragmented and siloed systems for data collection, which would reduce the efficiency of oversight and potentially allow more market abuse to go undetected or unpunished.
- Indirect Benefits of CAT Abolition for the Crypto Market
For the crypto market, the abolition of the CAT system itself does not directly impact the trading processes of Bitcoin or other crypto assets, but its symbolic significance is immense. First, it reflects a regulatory reassessment of the “limits of data surveillance”, meaning that the reflection on “excessive tracking” will indirectly influence policies on other digital assets. For decentralized exchanges (DEXs), on-chain trading activities, and self-custody wallet users, this regulatory “pullback signal” could imply greater technical and behavioral freedom.
At the same time, the abolition of the CAT system could drive some privacy-conscious traditional institutional investors or developers to further shift towards the on-chain ecosystem. In contrast, the crypto market provides a “semi-anonymous” mechanism through native blockchain transparency (publicly accessible but identity-protecting), striking a balance between transparency and privacy. If regulators lose the ability to conduct “centralized data scrutiny” in traditional markets, investors might focus more on platforms that already emphasize censorship resistance and data sovereignty.
It is also important to note that the fate of the CAT system could indirectly influence future approaches to KYC/AML (Know Your Customer/Anti-Money Laundering) regulations for the crypto market. After losing the CAT tool for traditional markets, regulators may shift to strengthening their data access demands for crypto asset exchanges. For example, they could push centralized exchanges to disclose more detailed user identities and transaction data, and even propose systems similar to a “blockchain-based CAT.” Therefore, although the move may seem like a “weakening of regulation,” the crypto space could ironically become a testbed for alternative regulatory measures.
Conclusion
In summary, if the U.S. CAT system is abolished, it would constitute an indirect benefit for the crypto market — not only by potentially creating a window for more relaxed regulation but also by highlighting the limitations of traditional regulatory logic in the face of emerging technologies.
Participants in the crypto market should be clear that this benefit does not signal the return of a “no-regulation era.” Instead, it means that regulatory logic and methods will be restructured. Those who can provide efficient, secure, and privacy-respecting services within a compliant framework will likely stand out in this evolving regulatory landscape.
