By Douglas Gillison
(Reuters) -Wall Street's top regulator on Wednesday approved new rules on the funding of a comprehensive market data surveillance system to split its operating costs among buyers, sellers and the stock exchanges where they trade.
The decision by the U.S. Securities and Exchange Commission faces stiff objections from the investment industry, which says it may be left paying an unfairly large share of the resulting fees.
The decision was the latest fraught turn in a decade-long effort to complete the so-called Consolidated Audit Trail (CAT), a repository of investor and transaction data meant to give regulators overarching visibility into U.S. market operations.
At an open meeting, the five-member Commission voted 3-2 to adopt changes proposed in recent months by an organization controlling that CAT, which comprises US stock exchanges and a non-government regulator.
The new funding model creates fees based on the volume of executed trades in shares and options. This shifts away from a structure based on message traffic and market share, while allowing stock exchanges several years to recoup hundreds of millions already spent.
The new rules aim to split the cost burden into equal thirds between exchanges, buyers and sellers, according to SEC officials.
They also would make buyers and sellers liable for “historical” fees representing investments made so far in developing the system. While the CAT system is partially operational, buyers and sellers have yet to begin paying in, officials said prior to the vote.
Republican commissioners objected, saying the system could leave investors facing rising costs and created excessive cybersecurity and privacy risks.
The investment industry has likewise strongly opposed the changes, claiming they unfairly distribute costs that are due to rise and could be passed on to investors. The Securities Industry and Financial Markets Association told the SEC on Tuesday that costs through the end of 2022 amounted to $500 million, were estimated at $240 million for this year and were due to rise each year.
The SEC mandated the CAT's creation in 2012 as a response to the "flash crash" of 2010, when major Wall Street indices temporarily erased nearly $1 trillion in market value in a matter of minutes.
When the system was formally adopted in 2016, then-SEC Commissioner Kara Stein referred to the CAT as a potential "Hubble Telescope" for securities markets. Officials say it can also allow regulators to spot market manipulation. A year ago, the SEC cited CAT data in the prosecution of an alleged $47 million front-running scheme.