Citadel Securities is leading the fight for payments for the market surveillance system

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Citadel Securities is leading an 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 nearly $1 billion in costs.

Brokers are asking regulators to suspend proposed new billing programs that would force them to contribute to the costs of the CAT system, or Consolidated Audit Trail, a real-time record of all activity in the U.S. stock and options markets that has been benchmarked . to a “Hubble Telescope” for stock markets.

Exchanges have so far footed the bill for CAT. But if the Securities and Exchange Commission doesn’t act in the coming weeks, brokers will start racking up fees starting Tuesday in bills sent by exchanges, which are fighting to recoup a slice of the system’s long-promised costs.

The CAT was conceived in the wake of the flash crash of 2010, when investigators struggled to identify what caused a market crash that at one point wiped nearly $1 billion off the value of U.S. securities. It is fully operational from 2022.

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

The regulator last year approved a plan for broker-dealers to bear two-thirds of the costs and shift the rest. Initial payment schedules from the exchanges and Finra were filed 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 files and sent new ones with minor changes. Now, unless the SEC issues another suspension, brokers will be billed in October based on September trading volumes.

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

Citadel Securities, which is controlled by billionaire Ken Griffin, warned the SEC that it “will be left with no option but to seek appropriate legal action” if the SEC does not suspend the billing by next week.

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

The company, one of the largest market makers in the US equity market, challenged the SEC in a Florida court last year over the legality of CAT’s funding model. This 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 have pointed out privately 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, CAT costs have continued to rise, partly as a result of increased trading volumes.

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

Other objections raised by brokers include whether they should be liable for costly mistakes while building the CAT. They question the annual operating budget, which is now approaching $200 million a year and about five times the original 2016 estimates.

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

Beyond its costs, the CAT has drawn wider concern about the access it will give regulators to individuals’ business 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 to be a risk to the privacy of the personal data it collects.