Sept. 6, 2023
On May 6, 2010, the financial markets experienced a brief but extraordinarily rapid drop in prices, falling more than 5% in a matter of minutes, only to recover a short time later. This rapid decline and recovery came to be known as the “Flash Crash.” Afterward, regulators worked to piece together what happened – a process that clearly demonstrated the importance of having the right data and the right information, especially in a world of fully-automated trading strategies and systems. It also highlighted the challenges regulators faced having to combine many disparate sources of data to analyze, after the fact, those market events. Over those next 10 days following the Flash Crash, the SEC sourced and analyzed price, time, and volume data on the over 19 billion shares executed on May 6, 2010, as well as quote data representing the best bid and offer for over 7,800 securities, for each exchange, for each millisecond during the trading day.
In the aftermath of this, the Commission adopted Rule 613 to create the Consolidated Audit Trail (“CAT”), so that regulators would have a means to efficiently and accurately track activity throughout U.S. securities markets. In other words, to help ensure that regulators would be able to quickly access data they need to analyze market activity in response to major market events. To ensure that regulators, investors, and markets alike, don’t remain in the dark. And many of those who commented on the adopting release supported the creation of a single consolidated audit trail, including commenters involved with regulating and operating the securities markets, such as self-regulatory organizations (“SROs”), as well commenters who populated data for, or made use of, existing audit trail systems, such as broker-dealers.
Rule 613 required the SROs to jointly submit a plan to create, implement and maintain the CAT, and to specify requirements related to data collection, reporting, and availability of these data to regulators, among other things. As explained in the adopting release, limitations on the source and use of trading data had hindered regulators in conducting important regulatory activities such as market surveillance, investigation and enforcement activities, and market reconstructions and analyses—such as the type of reconstruction and analysis needed to understand how the Flash Crash happened. The SROs then developed and submitted a plan, and in 2016 the Commission voted unanimously to approve the plan proposed by the SROs.
Despite the importance of the CAT to the performance of regulatory activities in modern, interconnected markets, the full implementation of the CAT has yet to be realized. In the meantime, the only constant is change. Our securities markets continue to grow and evolve, and market participants continue to find innovative ways to apply novel technologies such as artificial intelligence (“AI”), which introduces attendant opportunities, but also risks, to our markets.
Regulators need effective tools to keep pace with these changes, especially considering the potential for new technologies like AI to rapidly amplify the magnitude and potential effect of risks already present. We expect CAT to serve as one such tool in our regulatory arsenal, by improving the completeness, accuracy, accessibility and timeliness of order and execution data used by regulators. Accordingly, CAT implementation should be executed faithfully and expeditiously. Cooperation by all market participants is fundamental to accomplishing all of our larger goals — strengthening the integrity and efficiency of the markets, improving investor protections, and thereby promoting capital formation. It is with these goals in mind that I consider the proposed amendment to implement a revised funding model for the CAT today.
I would like to thank the staff in the Divisions of Trading and Markets, Economic and Risk Analysis, and the Office of the General Counsel. I am deeply appreciative of all your hard work on this order, including several very late nights, as well as on other CAT-related initiatives over many years. I am happy to support.
 See Preliminary Findings Regarding the Market Events of May 6, 2010, Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues (May 18, 2010) at 2, available at https://www.sec.gov/sec-cftc-prelimreport.pdf.
 See Rule 613 Adopting Release at 20.
 See SEC Press Release, SEC Approves Plan to Create Consolidated Audit Trail (Nov. 15, 2016) available at https://www.sec.gov/news/press-release/2016-240; see also Approval Order, CAT NMS Plan available at https://www.sec.gov/files/rules/sro/nms/2016/34-79318.pdf. Many commenters on the plan noted the costs of the system. CAT replaced certain legacy reporting systems that had their own costs. I recognize that any action may impose certain costs, but believe they are low in comparison to the benefits that will be generated and the revenues of the parties who bear those costs.