Thesys vs. Goliath: That’s One Big CAT

Spencer Doar

Spencer Doar

Associate Editor

Small company wins big with opportunity to build the Consolidated Audit Trail covering U.S. equities and options.

FINRA, FIS, Cinnober, Thomson Reuters – what do they have in common? They are just a few of the 30 bidders who lost out on developing the Consolidated Audit Trail (CAT) to Thesys Technologies LLC, a subsidiary of the proprietary trading firm Tradeworx, founded in 2009. To develop and implement the CAT, Thesys partnered with IBM (which was a bidder on its own, too), as well Rosenblatt Securities and law firm Latham & Watkins.

“You had some big tech companies that really understand tech but maybe don’t understand the markets that well,” Thesys Technologies CEO Mike Beller said. “You’ve got financial technology companies but most of them kind of live in a sort of old world. They understand the milieu but can they really build the tech?”

The CAT project stems from the fallout of 2010’s flash crash when regulators realized the need to comprehensively track trading activity. The Securities Exchange Commission adopted Rule 613 in summer 2012 which, per the SEC’s website, required the creation of an audit trail “that would allow regulators to efficiently and accurately track all activity throughout the U.S. markets in National Market System (NMS) securities.” (That means equities and options but not futures.) It was then left to the self-regulatory organizations (SROs), which are simply the relevant equity and options exchanges, to come up with a blueprint for the CAT, which they did by the end of 2014.

Thesys, as Beller said, is a “well-respected, not necessarily very well-known” fintech firm providing market structure technology. By winning the more than 3-year-long bidding process to develop the CAT, Thesys is poised to grow its sizeable footprint in financial markets.

Origins of Thesys Technologies

It’s hard to believe Thesys’ parent company, Tradeworx, began as an internet startup in 1999 before shifting to asset management in 2001. (Beller said the business was already focused on quantitative strategies and technology, so the shift wasn’t that much of a reach).

By 2008, the firm realized that much of its costs were sunk into developing its trading and execution systems. As a result, Thesys Technologies was spun out of Tradeworx in 2009 to monetize the increasingly burdensome technology spend.

Thesys’ first big deal was in 2011 to provide Bank of America Merrill Lynch with risk controls and low-latency market access. The BAML partnership has continued to grow, and now Thesys’ technologies touch 6 percent of the equities activity in the U.S. and 15 percent of Canadian equities daily. The firm also developed matching engine tech for Level ATS in 2013 and Convergex in 2014.

But most relevant to the CAT project was Thesys’ work with the SEC in 2012 to develop the Market Information Data Analytics System (MIDAS) which, per the SEC’s website, allows it to “view and analyze complete order books of individual equities,” a substantial big data and analytics endeavor which is cloud-based.

To illustrate the necessity of an analytical system with visualization tools like MIDAS, consider that the SEC’s investigative arm took four months to analyze what happened during the 2010 flash crash. Once assigned the task, Thesys teamed with Amazon Web Services and created the MIDAS platform in less than four months. The resulting system allowed the SEC to analyze billions of data points in seconds.

The CAT Process

When the CAT planning began, those following the developments thought FINRA would win the project partially because of its experience operating the Order Audit Trail System (OATS). But the SROs clearly had a change in mind.

According to Beller, Thesys had a different view, and more niche financial technology expertise, for the project. It acted as a thought leader, which other firms sought to emulate as the process went on and the 31 initial bidders were whittled down to three. (FINRA and FIS were the other two finalists).

“When the CAT opportunity came up, we realized the work we’d done on MIDAS and all the technology we had in the area of electronic trading was all relevant,” Beller said.

Thesys’ winning plan came down to three basic pillars: make the CAT easy to report into for the SROs and broker dealers, incorporate the right analytical tools to make the data useful for regulators and up the ante when it comes to security.

State of Affairs Moving Forward

Thesys officially won the process in January 2017. While the bidding process was slow, once Thesys was selected it “got going at a very rapid pace,” Beller said.

Thesys created a new entity, Thesys CAT LLC, to be the “plan processor.” As Beller said, Thesys Technologies has its own growing business to run, and a new subsidiary was needed to solely focus on the CAT and also to eliminate any perception of conflicting interests.

Beller said Thesys is on track to meet all the milestones. SROs will be the first to get the solution and begin to report into it in November 2017. In November 2018, the larger broker-dealers will begin reporting to the central repository. In November 2019, all the remaining broker-dealers will join the CAT.

Once the CAT is fully scaled, Beller estimated it will collect some 60 billion records a day.

After seven years of accumulating data, Beller estimated there would be 20 petabytes of data in the system, which would be some 20 million gigabytes.


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