Citadel Securities leads fight over payments for market surveillance system

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Citadel Securities is leading industry pushback against an effort by exchanges including the New York Stock Exchange and Nasdaq to ask traders to help foot the bill for a new market surveillance system that has already racked up almost $1bn in costs.

Brokers are calling for the regulator to suspend proposed new billing schedules that would force them to contribute to the costs of the CAT system, or Consolidated Audit Trail, a real-time record of all activity across US equities and options markets, which has been likened to a “Hubble Telescope” for securities markets.

Exchanges have so far footed the bill for CAT. But unless the Securities and Exchange Commission takes action in the coming weeks, brokers will begin racking up charges dating from Tuesday in bills sent by exchanges, which are fighting to recover a chunk of the costs, long promised to them, of the system.

The CAT was devised following the 2010 flash crash when investigators struggled to pinpoint what caused a market plunge that at one point wiped almost $1tn off the value of US securities. It has been fully operational since 2022.

The SEC tasked national exchanges and Finra, which oversees brokers, with building the system, on the understanding that the trading industry would eventually pay a significant portion of the costs.

The regulator last year approved a plan for broker-dealers to shoulder two-thirds of the costs and exchanges the remainder. Initial payment schedules from the exchanges and Finra were submitted in January. Typically such filings take effect immediately unless the SEC suspends them, which it did in this case pending review. That review has not yet been completed.

Last month the exchanges and Finra withdrew the payment filings and submitted new ones with minor changes. Now, unless the SEC issues a new suspension, brokers will receive bills in October based on September’s trading volumes. 

A flurry of regulatory filings and letters in recent weeks from industry groups including Citadel Securities, Virtu Financial, the American Securities Association and Sifma have called for the watchdog to suspend the bills.

Citadel Securities, which is controlled by billionaire Ken Griffin, has warned the SEC that it would “be left with no choice but to seek appropriate judicial relief” if the SEC did not suspend the billing by next week.

In a letter last week it described the latest filings as “brazen” and “an effort to extract hundreds of millions of dollars from broker-dealers such as Citadel Securities”.

The company, one of the biggest market makers on the US equity market, last year challenged the SEC in a Florida court over the legality of the CAT funding model. That case, brought in partnership with the ASA, is ongoing.

Exchange groups including the New York Stock Exchange, Nasdaq and Cboe Global Markets, which dominate the market, declined to comment. Finra also declined to comment. The SEC did not respond to a request for comment.

Exchange officials privately pointed out that they were ordered by the SEC to set up the system, and it was always planned that the costs would be shared with the industry. Since its implementation, the costs of CAT have continued to soar, partly as a result of rising trading volumes.

“We’re just recovering our costs. There’s no profit here,” said one executive involved in the project for several years. “They’ve made every manoeuvre possible to avoid paying for the CAT. That’s why we’re reaching $1bn and the industry is at zero.”

Other objections raised by brokers include whether they should be liable for expensive mis-steps during the building of the CAT. They question the annual operating budget, now approaching $200mn a year and roughly five times initial 2016 estimates.

Brokers have pointed out the wide disparities between mock bills sent out by the committee that operates CAT and their own internal estimates of their dues, which they plan to use as the basis for passing on charges to clients. 

Beyond its costs, the CAT has attracted wider concern over the access it will give regulators to individuals’ trading records. In a separate lawsuit filed in April in Texas, civil liberties groups are seeking to have the CAT declared unconstitutional because of what they perceive as the risk to privacy in the personal data it collects.