SEC Rethinks Market Surveillance Tool Some Investors Want to Axe

A controversial system to monitor Wall Street trading under development since the Obama administration is at a critical juncture, as SEC Chairman Paul Atkins attempts to rework the market surveillance tool and some plaintiffs push to abolish it entirely.

The Securities and Exchange Commission this month moved to pause litigation challenging its Consolidated Audit Trail, first proposed following the 2010 “flash crash” that wiped out $1 trillion in market value.

The SEC is reviewing the tool, which requires broker-dealers, exchanges, and clearing firms to report equity and options trade data in real time, following industry concerns about data security and costs to market participants now approaching $250 million a year.

But the only step that suffices would be to “kill the CAT,” a conservative think tank and investor plaintiffs said in a brief in Texas federal court last week, arguing the “dystopian surveillance scheme” was never endorsed by Congress and that it amounts to spying on US traders.

“No action taken by the SEC can cure the CAT’s structural and liberty-invading constitutional defects,” said Peggy Little, senior litigation counsel at the New Civil Liberties Alliance who represents the plaintiffs. “Neither the SEC’s original motion nor its reply suggests that it plans to terminate the CAT.”

As a practical matter, tweaking the tool would make more sense than a sweeping overhaul or quick teardown, securities lawyers said, citing the SEC’s limited resources and the amount of money already spent on the system.

“The SEC is understaffed, so they use data analytics,” said Lenin Lopez, a corporate securities attorney at Woodruff Sawyer. “If we had more visibility into how useful it was, I think that would make the SEC’s case if they want to keep it.”

An SEC spokesperson declined to comment.

Transparency, Security Fights

The SEC for now must fight in court to preserve a system that Atkins readily admits is due for a revamp, while Judge Alan Albright, a Trump appointee, decides whether to put the litigation on hold.

Meanwhile, leading industry players including the Securities Industry and Financial Markets Association, Nasdaq, and Cboe Global Markets Inc. have pitched smaller changes to streamline the CAT, rather than scrapping it altogether.

Among other recommendations, SIFMA this month urged the SEC to include the system’s cost in its budget so that congressional appropriators can keep a closer eye on the fees industry pays to fund the tool.

A separate lawsuit brought by the American Securities Association and Citadel Securities LLC sought to block the SEC and self-regulatory organizations from collecting those fees for the CAT, but the US Court of Appeals for the Eleventh Circuit rejected the bid to block fee-based funding last November.

The SEC is also considering a proposal that would end the CAT’s collection and storage of personal customer information, the agency said in a brief this week, highlighting an audit trail format that would collect only anonymized trade data. The agency in February already issued an exemptive order limiting the system’s access to sensitive customer data.

“It’s not surprising that the industry would like there to be less transparency, but I think the CAT is designed exactly to promote transparency,” said Benjamin Schiffrin, the director of securities policy at Better Markets, a group that advocates for stricter financial regulations. “If we did away with the CAT, we go back to a more opaque environment.”

The SEC this month also withdrew a proposal from Trump’s first term that would have boosted the CAT’s security, suggesting the Atkins-led agency wants to take a different approach.

‘Slicing and Dicing’

Atkins has embraced some concerns about the CAT, saying last month that “the financial services industry and Congress have rightly pushed back on the seemingly endless cost increases and the risks of storing so much sensitive data together”

But kicking off a review rather than declaring the system dead on arrival indicates an open discussion of pending proposals that may sustain the CAT amid the backdrop of legal challenges and industry pressure.

Modifying the CAT may require a good degree of “slicing and dicing” to determine which core data regulators truly need to respond to scenarios like the flash crash or other emergencies, said Russell Fecteau, of counsel at Davis Wright Tremaine LLP who advises broker-dealers and other financial institutions.

“I don’t think they can responsibly go to a place where they drop it completely,” he said. “But I see them looking at it and critically saying, ‘there’s parts of this we want to use and we want to get this right-sized.’”

The case is Davidson v. Atkins, W.D. Tex., No. 6:24-cv-00197, 6/23/25.