May 26, 2017

CAT Update: Reporting Fees and Retirement of OATS

Michael Lalicata,
Management Consultant, Compliance Services, Jordan & Jordan

As we move closer to the technical specifications release date of November 15, 2017 for Industry Members there have been some recent updates related to the Consolidated Audit Trail (CAT).  Information has been released relating to the fee structure for Industry Members for CAT reporting and the retirement of the Order Audit Trail System (OATS).

CAT Reporting Fees

Each Industry Member (other than Execution Venue ATSs) will be placed into one of nine tiers of fixed fees, based on orders, cancels and quotes (“message traffic”) in Eligible Securities for a defined period.  The fees for Industry Members can range from $101,004 on the high end, $12,489 at the midpoint, or even as low as $66 due on a quarterly basis. 

The message traffic per member will be comprised of historical equity and equity options orders, cancels and quotes provided by each exchange and FINRA over the previous three months.  After an Industry Member begins reporting to the CAT, message traffic will be calculated based on the Industry Member’s Reportable Events submitted to the CAT. 

The fee structure for equities and options Execution Venues has been brought into question. It involves a two-tier fee structure which encompasses a flat fee for each tier mentioned in the release.  One concern related to the Execution Venues for NMS stocks and OTC equity securities is that there appears to be high barrier of entry into the second tier.  The range of market share in the second tier is between .0000002% and 0.79%, which causes the remainder of the Execution Venues subsequently to fall into the first tier, which has a market share range of 1.09% - 29.9%.

We expect to see commentary from the smallest venues in both the first and second tiers as it relates to market share, and whether or not it is equitable for a venue participating on the lowest end of the range to pay the same annual fee of $255,500 (Tier 1) and $155,280 (Tier 2) as the firms on the higher end of the ranges.

The consensus will be gauged when the Industry Members comments due June 12, 2017 are released. 

Retirement of OATS

FINRA’s proposed methodology of the retirement of duplicate reporting systems was released on May 15, 2017. The release confirms the proposal for a single cut-over approach rather than a firm-by-firm cut-over of the retirement of reporting duplicative to CAT such as the Order Audit Trail System (OATS). 

So, when can members stop reporting to OATS?

FINRA states that the retirement will occur once the levels of accuracy and reliability, described in the proposal, have been achieved.  FINRA is proposing a 5% pre-correction and 2% post-correction thresholds, measured by averaging the aggregate error rate across the period of 180 consecutive days in various categories. 

This accuracy and reliability will be tested though Rejection Rates and Data Validations, Intra-Firm Linkages, Inter-Firm Linkages, Order Linkage Rates, and Exchange and TRF/ORF Match Rates.

In addition to the areas mentioned, FINRA’s use of the data in the CAT must confirm that:

  • (i) Usage over the 180-day time period has not revealed material issues that have not been corrected;
  • (ii)  The CAT includes all data necessary to allow FINRA to continue to meet its surveillance obligations; and
  • (iii) The Plan Processor is sufficiently meeting all of its obligations under the CAT NMS Plan.

As it relates to small broker-dealers, FINRA’s proposal indicates that they have identified approximately 300 member firms that currently report to OATS and meet the definition of “Small Industry Member”; however, only ten of these firms submit information to OATS on their own behalf, and eight of the ten firms report very few orders to OATS.  FINRA is suggesting that the plan be amended to include these 300-small broker-dealers in the CAT reporting with the medium and large brokers two years (instead of three years) after the Effective Date (date the CAT NMS Plan was approved).

This proposal for the retirement of OATS is a great start, but many questions remain around how long it will take to confirm the data accuracy from the CAT once reporting begins, and what types of data will be used to confirm when OATS will be retired?  

Some additional questions raised on the FIF CAT industry working group call on May 19th were:

  • Will the options accuracy and reliability thresholds need to be achieved prior to the retirement of OATS (Options reporting is not a current OATS requirement)?
  • Why include customer information in the testing phase considering it is not a current OATS requirement?
  • Is the 180-day testing scored on a rolling period which is tested on an ongoing basis until threshold requirements are achieved?


FINRA believes that the overall accuracy and reliability thresholds for the CAT mentioned previously would need to be met under any conditions before firms could stop reporting to OATS.  Despite this, some broker dealers are still adamant that the retirement of duplicate systems should be on a firm-by-firm basis based on the achieved error rates by each individual firm, rather than a single-cut over approach to reduce the expenses related with duplicative trade reporting.  We anticipate that the broker-dealer community will comment on this, and other areas related to the retirement of duplicative reporting systems.