During FINRA’s 2023 Annual Conference held on May 16-18, 2023, several panels provided insight into how FINRA is currently using CAT data for market surveillance and how FINRA plans to use the data going forward to both develop more sophisticated surveillance reviews and further promote industry-wide efficiencies.
According to Stephanie Dumont (EVP, FINRA Market Regulation and Transparency Services), FINRA has transitioned all of its surveillance routines to be CAT-based, expanding the sophistication of its NMS and OTC equity and listed option-specific surveillances. As stated by Gene DeMaio (EVP, Options Regulation Section of FINRA’s Market Regulation Department), CAT has been a “game changer” particularly for option regulation because it provides FINRA with data points not previously available under the COATS reporting regime, and thus, the industry should expect more streamlined and targeted options-related investigations. Additionally, the visibility provided by the CAT has (and is expected to continue) assisted FINRA in identifying false positive results from, among others, its front-running surveillance routines because the CAT data clearly identifies principal and riskless principal activity. The panelists also indicated that FINRA is using CAT data to surveil cross-market and cross-product (i.e., options impacted by swap trading), fractional share order marking (i.e., held v. not held), and firms’ pricing of fractional share fills based on a review of representative orders.
The panelists indicated that FINRA is continuing to look for ways to further capitalize on the granularity of CAT transaction data by developing additional surveillance alerts to detect market misconduct and by assessing whether there are any redundancies in historical regulatory regimes that can be eliminated (noting that electronic blue sheets and Rule 605 disclosures are on the proverbial chopping block). Further, once the CAIS system is officially “live” likely later this year (date TBD), FINRA is planning to use client-level data to surveil for possible coordinated manipulative trading activity across broker dealers and product types to make quicker referrals to the SEC.
Firms should expect similar types of surveillance development from the other regulators who have access to the CAT, including the SEC and all of the CAT “Participants” (i.e., subscribing national securities exchanges and national securities associations). Please contact the authors if you have any questions regarding CAT-related compliance or enforcement.
