Have US firms had enough of surveillance?

We are used to hearing that European privacy laws are a stumbling block to the surveillance of broader populations outside strictly regulated personnel or to more detailed trader profiling. In the US, in general, surveillance teams have fewer problems.

But a long-running fight against the consolidated audit trail (CAT) is changing that. This is the U.S. Securities and Exchange Commission’s (SEC) tool, operated by 25 Self-Regulatory Organisations (SROs) including equity and options exchanges, to surveil trading activity. For the SEC, the data within CAT has become a key regulatory tool and since it gives near real-time insight it is a significant tool against market misconduct.

But CAT is causing all sorts of ructions. Conservative groups like the New Civil Liberties Alliance, arguing that the SEC’s data collection under the CAT violates the First, Fourth and Fifth amendments, as well as the Administrative Procedure Act.

Said Peggy Little, NCLA’s senior litigation counsel, in a statement: “By seizing all financial data from all Americans who trade in the American exchanges, SEC arrogates surveillance powers and appropriates billions of dollars without a shred of Congressional authority — all while putting Americans’ savings and investments at grave and perpetual risk.”

This may be political points scoring, but the industry is also pushing back in the same vein. Chris Iacovella, president and CEO of the American Securities Association (ASA), has also welcomed the legal challenge saying, “ASA remains vehemently opposed to the CAT’s unconstitutional collection of investor’s personal and financial information and we urge every American to question this unprecedented intrusion into their private lives.” 

The latest assault on CAT is being brought by Citadel Securities which is leading a suit seeking to have the CAT declared illegal. In a court brief it accused the SEC of trying to “keep the American people in the dark about the adverse impacts of its unprecedented effort to subject the national securities markets to an Orwellian surveillance regime.”

One way to interpret this fight is that Wall Street was happy enough being left to surveil itself, and to be fined heavily for failings in this area, but is much less keen on the level of surveillance made possible by more comprehensive data collection and analytics. In this reading, the privacy argument is a smokescreen put up by the markets’ most powerful players to avoid real scrutiny.

Another possibility is that it is less about surveillance and more about money. Exchanges have so far footed the near $1 billion bill for CAT. But unless the US Securities and Exchange Commission backs down, brokers will soon be receiving hefty bills sent by the exchanges, under an agreement which promised that they would be reimbursed.

Despite the fact that this has always been the plan, the ASA, SIFMA and FINRA all say this is unfair and that the fee schedule needs to be revised or scrapped. SIFMA has said, for example, that “the allocation of more than two-thirds and potentially 100% of CAT costs to broker-dealers is contrary to law and arbitrary and capricious. The Commission's allocation of costs is inequitable and unreasonable.” SIFMA supports the ASA and Citadel’s legal actions.

So is the cost argument a distraction from a broader pushback against surveillance, or vice versa? Only time will tell. But It’s clear that the era of unquestioned commitment to whatever-it-takes surveillance is over.