Market Surveillance Tool in Jeopardy After Citadel Win (Correct)

The SEC will soon be forced to renovate or scrap its system to collect trading data and prevent “flash crashes,” after Citadel Securities prevailed in a court challenge over the tool’s funding model.

Citadel and the American Securities Association notched a partial win when a federal appeals court last month held the Securities and Exchange Commission’s funding plan for its Consolidated Audit Trail—effectively relying on broker-dealers and their customers to foot the bill, now reaching $250 million annually—was “arbitrary and capricious.”

The US Court of Appeals for the Eleventh Circuit stayed its ruling for 60 days, giving the SEC a short window to conduct further economic analysis and reconsider how to allocate costs for the market surveillance tool. But the agency under Chairman Paul Atkins may also determine that the system is altogether too burdensome to operate in its current form, securities lawyers said.

“It could be abandoned entirely, particularly under the current administration,” said Brenda Hamilton, a securities lawyer and founder of Hamilton & Associates Law Group PA. “Atkins’ focus has really been on cost efficiency, reducing burdens, reducing regulation, and the audit trail seems to be contrary to his mission.”

Atkins’ public statements suggest the agency would more likely work quickly to overhaul the surveillance system.

An exemptive order in February already limited the system’s access to sensitive customer data, while the SEC is considering a proposal that would end the CAT’s practice of collecting and storing personal customer information, according to an agency brief in a separate case.

“I do think it’s a meaningful priority for Atkins, because it’s a big industry issue and a big expensive mess right now,” said James Brady, a partner in Katten Muchin Rosenman LLP’s financial markets and funds practice. “Atkins would have made changes no matter what, but it is possible this could speed it up.”

An SEC spokesperson in an emailed statement said the commission is “reviewing the decision and will determine next steps as appropriate.”

Adjusted or Abandoned

Privacy and cost concerns associated with the CAT have generated controversy beyond Wall Street.

A separate suit by a conservative think tank and investors in Texas federal court called on the SEC to “kill the CAT,” describing it as a “dystopian surveillance scheme.”

First proposed after the 2010 “flash crash” wiped out $1 trillion in market value, the CAT collects as many as 500 billion records a day and lets the SEC keep an eye on markets in real time without further expanding its workforce or dedicating existing staff to watching activity that occurs across securities exchanges.

The agency may be hard-pressed to make the CAT legally sound absent explicit legislative support, according to Lenin Lopez, corporate securities attorney at Woodruff Sawyer.

Rather than ditching the system entirely, however, the SEC could pull back on certain aspects of the CAT’s data collection and related fees that sparked the legal challenges, Hamilton said.

The SEC operated efficiently to address market issues prior to the CAT’s introduction and the agency isn’t completely dependent on the system as its sole regulatory tool, she added.

Getting Industry on Board

The CAT’s future may hinge on the support of industry groups and exchanges including the Securities Industry and Financial Markets Association, Nasdaq, and Cboe Global Markets Inc. that have issued their own proposals to rework the tool.

“The SEC is going to have to move quickly. They’re going to have to get the exchanges to cooperate,” Brady said. “I strongly suspect there will be a scaling back by the SEC of the amount of information collected, and then presumably that will flow through to it being a cheaper process to actually report and collect the data.”

SIFMA implored the SEC to include CAT costs in congressional budget requests, allowing appropriators to more closely monitor the fees associated with the surveillance system.

“The exchanges have come back critical of CAT after learning what the costs are going to be to operate it,” Hamilton said. “A lot of people think that some of the opposition to CAT might go away if the cost of CAT was paid under the SEC’s normal budget, like any other enforcement tool, instead of being passed on to FINRA’s members and ultimately a portion of it to investors.”

Barring any meaningful SEC action on CAT funding, a return to the Eleventh Circuit could spell doom for the system.

Judges on the appeals panel already acknowledged Wall Street’s appetite for throwing out the system entirely, according to Brady.

An ultimately successful attempt to thwart the CAT’s funding model as an “arbitrary and capricious” application of securities statutes also opens the door for similar challenges to other agencies.

“This funding is paramount to its survival,” Lopez said. “I suspect a year from now, it will be like that was the real first domino.”

The case is American Secs. Assn. v. SEC, 11th Cir., No. 23-13396, 7/25/25.