The more laws, the less justice.  Cicero

Imagine if your Senator or Congressman proposed a law that required every American to turn over to the government data for every single trade they made in the market. Your broker could not opt out, nor could you, unless you stopped investing your money in U.S. exchanges.  All trading information would be stored in a government database now estimated at over hundreds of billions of records per day. The Securities and Exchange Commission (SEC) and private regulators such as Financial Industry Regulatory Authority (FINRA also known as self-regulatory organizations or SROs) could mine the data for whatever purposes they choose—as can dozens of firms in the private sector.  Thousands of people—estimated at a recent Senate Banking Committee hearing at 3000—would have access to your trading history and that of every other American or individual using the U.S, markets.  Would you vote for a politician who proposed such sweeping surveillance over your investment decisions and private market transactions?

Congress did not enact such a law, nor did you put into office any politician who did.  Instead, an Obama-era rule proposed by unelected and unaccountable bureaucrats in 2010 and finalized in November 2016 is set to descend upon the U.S. exchanges and force them to turn over the trading information of anyone who trades in the U.S markets. There are no rules limiting how this information can be used by the regulators and their partners in the private sector.

This expensive, mass Orwellian market surveillance project has been percolating in a troubled stew of regulatory self-interest, mismanagement, opportunism, constitutional lassitude and public ignorance for nearly nine years at the SEC.  The final program, known as the Consolidated Audit Trail (CAT) is dangerously unconstitutional and unauthorized by any lawmaking body. This power-grab by bureaucrats imperils the security and vitality of the greatest wealth-creating mechanism the world has ever known.  It is impossible to overstate the unconstitutionality, lunacy, grandiosity, waste and hubris that led to this disaster-in-the-making.

Surrendered Civil Liberties

As one current SEC Commissioner, Hester Peirce, has forcefully argued, (See This Cat is a Dangerous Dog), we would not for a moment tolerate government organizations partnered with private firms to collect complete information on all everything you buy, nor a program where the government received a “direct feed” of your movements from your car’s GPS.  Yet CAT proposes to do just that with the far more valuable, and therefore vulnerable, database of your investments or retirement savings. Further, your civil liberties to be free of suspicionless government seizures has just been sold out from under you by an unelected group of bureaucrats in the last gasp of the last administration.  Such unlimited access to data allows the government to create post-hoc theories of enforcement that threaten your civil liberties to be free of government intrusion in the conduct of your life. We already live in a regulatory state that has expanded its powers over Americans in ways unthinkable even a generation ago, much less envisioned by the enactors of the Bill of Rights.

Exposure of Mass Retail Investor Data to Cybercriminals

This assembly of all trading information in American markets also paints an irresistible bulls-eye on the side of this scary government warehouse.  Cybercriminals, armed with the same technological tools and a proven record of hacking government databases including the SEC’s own government filing database, can target your IRA or other savings.  When they do hack this vast and alluring gold mine, who do you sue? A sovereign that too often has immunity?

Fiasco and Folly

The almost nine-year journey from enactment to impending final plan has been detailed in numerous industry publications.  Secrecy, mismanagement, waste, deception, and confusion plagued the project from day one with bidding wars succeeded by vendor failures, and regulators cluelessly distancing themselves from accountability for the disaster they themselves set into motion.  Amazingly FINRA bid on the work, while serving on the committee that would award the work. Now that the vendor has been fired, it is assumed that FINRA has stepped into its place.

An unnamed insiders’ description of CAT captures the lunacy:

When the SEC wrote this rule, think of 13 crazy aunts and uncles…that the self regulatory organizations put in charge of this.  Think of the SEC putting them in a van, driving them out into the desert, handing them shovels and saying, “Dig your own graves, we’ll be back in a year!’ The SEC comes back, and these guys are still standing with shovels and they’re like, ‘But we told you to dig your own graves! This time we’re serious.  We’ll come back in a year and this time you’d better have dug them.’ They come back and they are still standing there.”

CAT’s Tale: How Thesys, the SRos and the SEC Mishandled the Consolidated Audit Trail, Waters Technology, Feb. 14, 2019. (CAT’s Tale)

No one even knows who owns this behemoth.  An outfit called CAT NMS (National Market System) appears to be running this project, and reports assume it owns the intellectual property.  Shockingly, the contract is not public, so no one knows who has ultimate responsibility, control and ownership of the gold mine.

Suicide-by-Surveillance of American Exchanges

A schoolchild could figure out that a database this vulnerable and attractive to criminals, which puts Americans’ liberties at risk both for government harassment and/or prosecution while at the same time exposing their wealth to theft, will drive Americans away from investing in American markets.  Regulators who lack authority conferred by a carefully debated law that has passed through two houses, and has been signed by a President, have no such power over our lives and transactions. Yet, like sheep, we have for too long slept on our rights and just assumed a general rulemaking delegation empowers an administrative agency to assert such seismic powers over our lives.  It does not.


CAT is just one example of public acquiescence in government abuse of power made possible by the toxic mix of technological advances and regulatory imperialism.  Somebody in government says what a cool idea it would be to have ALL the data on everything, and the leviathan is set into motion. SEC chair, Jay Clayton, grilled by both houses of Congress about the threat posed to American security and markets, “found himself in an awkward position—it was the SROs tasked with building the CAT, yet the SEC was increasingly being asked to shoulder responsibility for its defenses [and] … getting dragged into an uncomfortable discussion about what types of information the CAT would collect, and whether that was appropriate.” CAT’s Tale, at p.6.

This gets the analysis exactly backward!!  Of course the SEC should be called to account for this madness.  Its flex of unchecked power rushed the final rule into effect in November 2016 of an election year and its transparent ploy to shift responsibility to the SROs is both absurd and a constitutional moral hazard.

The mayhem that has characterized CAT should come as no surprise.  Anything this lawless, this gargantuan, and this insane is preordained to descend into chaos and ruin.  As Commissioner Peirce says, “It is not too late to change course.” Not only is it not too late, it is essential that the government agencies that launched this disastrous program be reined in, called to account, and restrained from such lawless and destructive insanity.  Its defenders will say it is too big to fail. The public must understand that this is too big and therefore must fail.  If not, the eventual outcome will be damage to if not destruction of US capital markets motivated by unchecked regulatory thirst for the surrender of our civil liberties.

–Peggy Little, Senior Litigation Counsel, NCLA