CAT got the cream
This has been a good week for highly entertaining and/or high-profile SEC cases. Here is one from yesterday that could easily fly under the radar, but is still worth highlighting.
From the SEC’s press release:
The Securities and Exchange Commission today announced fraud charges against Lawrence Billimek, an employee of a major asset management firm with securities portfolios worth billions of dollars, and Alan Williams, who previously worked at several financial industry firms, for perpetrating a multi-year front-running scheme that generated at least $47 million in illegal trading profits.
The SEC’s complaint, filed in federal district court in Manhattan, alleges that, since at least September 2016, Billimek would inform Williams of the asset management firm’s market-moving trades prior to their execution. As the complaint alleges, on the same day, Williams would trade in the same securities prior to Billimek’s employer or while multiple large orders were being placed by the employer. Williams would close his positions after the price of the security moved as expected. This alleged front-running scheme resulted in proceeds of more than $47 million.
It’s a pretty old-school enforcement case. The SEC says that between 2016 and 2022 Billimek, an equities trader at TIAA’s $1.1tn asset management subsidiary Nuveen, leaked information about big Nuveen trades to Williams, a day trader.
The size of the $47mn profits is mildly notable, as is the fact that Williams apparently only wired $10mn back to Billimek. Honestly, if you can’t trust a front-running co-conspirator these days . . . But what intrigued us was this line (FTAV’s emphasis below):
The SEC staff analyzed trading using the Consolidated Audit Trail (CAT) database to uncover William’s allegedly fraudulent trading and to identify how he profited by repeatedly front-running large trades by Billimek’s employer.
Longtime US stock market watchers will be painfully aware of the CAT saga (although they may have repressed it).
The Flash Crash of 2010 revealed that even US regulators struggled to get to grips with the balkanised US equity market ecosystem, so the SEC proposed a comprehensive database that would continuously collect and warehouse all US stock orders, quotes and executed trades in real time. Then-SEC commissioner Kara Stein memorably dubbed it “the Hubble Telescope for the securities markets”.
Because of the US regulatory system’s own stupidly balkanised set-up, CAT would not include derivatives overseen by the CFTC. But even without this, it was a Herculean undertaking. The SEC estimated at the time that the size of the CAT database could grow to 21 “petabytes” — or 1,000 terabytes — of information within the first five years, building it would cost $4bn, and to maintain it as much as $2.1bn a year. But the benefits were obvious, so regulators pushed through.
Let’s just say that the gestation was long and troubled. After first being mandated in 2012 the first basic iteration only went live in 2018. The full version didn’t get up and running until the summer of 2022.
This is why yesterday’s statement is so intriguing. We think — though we could be wrong, not having checked every single SEC enforcement matter — that this is the first case to be explicitly attributed to the CAT.
For example, another big insider trading case that the SEC filed in July only said that the “actions announced today originated from the SEC Enforcement Division’s Market Abuse Unit’s (MAU) Analysis and Detection Center, which uses data analysis tools to detect suspicious trading patterns”.
Perhaps, after a tragicomically troubled birth, the CAT project is finally going to start notching up some wins?