Regulatory Risk and the Future of Financial Infrastructure: Lessons from Citadel's CAT Victory

In early 2025, a federal appeals court in Atlanta delivered a landmark ruling that upended the Securities and Exchange Commission's (SEC) funding model for the Consolidated Audit Trail (CAT), a $250 million-per-year program designed to track U.S. trading activity. Citadel Securities, alongside the American Securities Association, won a legal victory that forced the SEC to admit its cost-allocation framework was “arbitrary and capricious.” This decision, however, is not just a win for a single firm—it signals a broader shift in how regulators approach accountability, cost fairness, and the governance of financial infrastructure. For investors in fintech, broker-dealers, and market infrastructure firms, the implications are profound.

The CAT Case: A Microcosm of Regulatory Overreach

The CAT, conceived after the 2010 flash crash, has long been a lightning rod for controversy. Critics argue it invades market privacy and creates a bloated, opaque database of 500 billion records daily. Citadel's challenge focused on the SEC's failure to update cost projections for a decade, leaving firms like Citadel and others to shoulder disproportionate financial burdens. The court's ruling—halting the funding model to allow the SEC to conduct a new economic analysis—exposed a critical flaw in regulatory decision-making: the lack of transparency and proportionality in cost allocation.

This case mirrors broader trends in financial regulation. From the 2023 banking crisis to the 2024 CrowdStrike outage, regulators are under pressure to justify not just the purpose of infrastructure projects but also how costs are distributed. For instance, the EU's Digital Operational Resilience Act (DORA), which took effect in January 2025, mandates rigorous third-party risk management. Similarly, the UK's Prudential Regulation Authority (PRA) now requires insurers to outline solvent exit plans, emphasizing accountability in crisis scenarios.

Strategic Shifts in Cost Allocation and Accountability

The Citadel ruling highlights a growing regulatory focus on equity in cost allocation. Historically, financial infrastructure projects have relied on “cost-plus” models, where firms bear expenses based on historical usage or arbitrary metrics. But as the court noted, these models often ignore evolving market realities. For example, the SEC's CAT funding plan failed to account for the surge in algorithmic trading and the rise of non-bank financial institutions (NBFIs), which now control nearly half of global financial assets.

Investors should watch for similar challenges in other sectors. The KPMG Banking Cost Transformation report underscores a shift from cost-cutting to strategic cost allocation. Firms are now incentivized to align spending with value creation, using metrics like cost-to-serve (CTS) and return on equity (ROE). This trend is evident in the fintech sector, where companies like Robinhood and Virtu Financial (both named in the CAT case) are reengineering operations to reduce overhead while maintaining compliance.

Risks and Opportunities for Investors

The Citadel case raises two key questions for investors:
1. Who bears the cost of regulatory overreach?
The CAT ruling demonstrates that firms with deep pockets and regulatory expertise can challenge unfair cost models. However, smaller broker-dealers and fintechs may struggle to absorb compliance costs. For example, the SEC's recent PII exemption for CAT reporting—a response to industry pressure—shows regulators are beginning to listen, but only after sustained legal and political battles.

1. How will regulators adapt to technological disruption?
   The 2024 CrowdStrike outage, which disrupted global markets, forced regulators to rethink third-party dependencies. The Basel Committee's push to oversee “critical third parties” and the EU's DORA framework are early signs of a new era where operational resilience is non-negotiable. Firms that invest in AI-driven risk management and decentralized infrastructure—such as blockchain-based settlement platforms—will have a competitive edge.

Strategic Recommendations for Investors

1. Prioritize firms with agile compliance frameworks.
   Companies like Intercontinental Exchange (ICE) and Nasdaq, which have proactively updated their systems to meet DORA and CRR3 requirements, are better positioned to navigate regulatory shifts. Avoid firms that rely on legacy infrastructure with high compliance costs.

2. Monitor third-party risk exposure.
   The CrowdStrike incident revealed how vulnerable financial systems are to single points of failure. Investors should scrutinize firms' third-party risk management disclosures and favor those with diversified technology stacks.

3. Leverage regulatory trends for sector rotation.
   As the SEC revises the CAT funding model, look for opportunities in firms that provide cost-allocation analytics or regulatory technology (RegTech). For example, tools like InfraFair, used in energy networks, could be adapted to financial infrastructure to ensure transparent cost distribution.

4. Beware of regulatory fragmentation.
   The U.S. election in 2024 and potential deregulatory shifts under a new administration could create divergent standards between the U.S. and EU. Firms with cross-border operations—such as Citadel and Goldman Sachs—may face higher compliance costs, but they also stand to benefit from harmonization efforts in the long term.

Conclusion: The New Normal in Financial Infrastructure

The Citadel-SEC battle is a microcosm of a larger transformation in financial regulation. As regulators grapple with the complexities of modern markets, the focus is shifting from rigid compliance to dynamic accountability. For investors, the lesson is clear: regulatory risk is no longer a static factor—it's a moving target that demands agility, foresight, and a willingness to challenge outdated models. Firms that embrace this reality, like Citadel and its peers, will not only survive but thrive in the evolving landscape.