What Are They Trying to Hide?
Two exchanges have suggested that the SEC eliminate options quotes from the Consolidated Audit Trail
The exchanges and their industry friends continue to try to dismantle the SEC’s main market surveillance system known as the Consolidated Audit Trail (CAT). The latest attack comes from two exchanges, Nasdaq and Cboe, who filed a “Petition for Rulemaking and Exemptive Relief to reduce the costs of the CAT” which seeks to revise major areas of the CAT.
One of their recommendations is for the CAT to stop collecting information on options quotes. You read that right, Nasdaq and Cboe (who happen to own a combined 10 of the 18 US options exchanges) suggest that options market maker quotes are not necessary for surveillance. Here is what they wrote in their petition:
Stop Collecting Voluminous and Unhelpful Options Data. Reporting options market maker quotes adds little regulatory value but, even with recent cost savings initiatives related to options market maker quotes, that data is still a major cost driver for both storage and computation. The unique nature of the listed options market and options market maker activity make it such that consolidated collection of the options market maker quote data detail is not necessary for effective regulatory oversight nor cost justified.
They also provided some details about the number of options quotes that the CAT stores:
Options quotes comprise approximately 98% of all data that SROs report to the CAT and approximately 80% of all data that the CAT stores.
Nasdaq and Cboe want you to believe that stopping the collection of 98% of the CAT data would save a significant amount of money. But, in their petition, they concede that eliminating options quotes from the CAT would only save “several million dollars per year”. Considering that annual CAT costs are almost $250 million, saving only a couple of percentage points of cost doesn’t seem like a good risk reward tradeoff.
The Growth of the US Options Market
Why are Nasdaq and Cboe trying to eliminate options data from the CAT? Could it be that they are worried what the SEC might discover about one of the fastest growing asset classes? Bloomberg recently published some astounding figures on the growth of the US options market:
Activity in the US listed options market is at all-time highs, with participants trading 60.5 million contracts a day in April, 32.5% more than a year earlier.
Activity in options contracts with zero-days-to-expiration (0DTE) accounted for 23.2% of all options volume year to date through April.
Individual investors traded 32.9 million option contracts a day in 1Q
Retail brokers received $693 million in payment for order flow for options trades in 1Q.
Eliminating the CCTV footage
Imagine a scenario where there is CCTV footage of a person lying on the ground with two people running away from the scene. Did a crime occur? We can’t be sure but since there is CCTV footage you can rewind the video to see what occurred before the incident. The CAT holds the CCTV footage for the market but eliminating options quotes would be like eliminating CCTV footage of events leading to a crime.
While we haven't yet seen an options-related market manipulation case using CAT data, we wouldn’t be surprised if the now fully operational CAT has already identified some issues with options quotes. In other words, the CCTV cameras have been rolling.
Comprehensive Review of CAT Costs
Earlier this year, SEC Chairman Paul Atkins called for "a comprehensive review of the CAT" to examine the costs of the system. This is a good idea and one that should be undertaken immediately. FINRA, the operator of the CAT, should be able to find some significant savings in their data storage costs. And maybe some of the bright engineers that work in the industry can assist the folks at FINRA in finding ways to lower their costs.
Reducing storage costs and reviewing CAT’s efficiency makes sense but eliminating options quotes to save a few dollars just opens the door to more market manipulation. CAT is a critical regulatory tool that must be preserved to protect investors, which is one of the main missions of the SEC. SEC Chairman Atkins reiterated this mission in a recent Senate Appropriations Committee hearing:
“Investor protection is vital to our mission—holding accountable those who lie, cheat, and steal. The SEC will remain vigilant in our important role to ensure that investors have confidence to participate in the markets.”
Keep the CCTV cameras on.
This is a dumb article. It fails to enunciate or consider or debate the "other side" of the conversation, which is the SROs' legitimate concern that CAT costs too much, and investors ultimately pay that cost.
It also fails to consider that each exchange already has 100% of its own quote data, and can surveil it with or without the help of CAT data.
So what harm or impediment will actually exist if the options quotes data isn't duplicated in CAT? The author fails to explain this -- he just tosses out a conspiracy theory that the exchanges want to "hide" something?