One of the biggest insights to come out of the May 2010 Flash Crash—when the Dow Jones industrial average suddenly plunged almost 1,000 points, then quickly recovered—wasn’t just how automated the stock market had become, but how little visibility regulators had into it. While high-frequency traders had spent the previous decade building vast computer systems to suck up torrents of market data to feed into their trading algorithms, the Securities and Exchange Commission was stuck in the 20th century, hopelessly outgunned in their ability to track this new breed of computer traders.
The man in charge of building a better surveillance system for the SEC is Gregg Berman, a Princeton-trained physicist who in January was promoted to lead the SEC’s newly created Office of Analytics and Research. His primary task is to give the SEC its first view into what high-frequency traders are actually doing. Rather than building its own supercomputer, Berman decided it would be better to buy one from the same types of traders he’s hoping to keep a better eye on.
So last fall, the SEC said it would pay Tradeworx, a speed-trading firm out of New Jersey, $2.5 million to use its data collection system as the basic platform for a new surveillance operation. Codenamed MIDAS (Market Information Data Analytics System), the system scours the market for data from all 13 public exchanges.
Midas went live in February. It not only gives the SEC access to the same kinds of market data that most speed traders get, it allows the agency to search for patterns and potentially flag manipulative strategies. On Wednesday, SEC Chairman Mary Jo White told a conference room of securities traders that next week the SEC would unveil a public website on which it will publish the trading data Midas has been collecting for the last nine months.
“We expect this new tool to transform the debate on market structure by focusing as never before on data, not anecdote,” White said in prepared remarks for the Security Traders Association’s market structure conference.
Users will be able to sift through “easy-to-read charts and graphs” compiled using the Midas data, as well as SEC research on the effects that certain speed trading strategies have on the markets, like those that cancel a high percentage of orders. This means that you, me, and everyone else with an Internet connection can now (in theory) have a window into some of the same types of market data that the most sophisticated traders have.
This isn’t just the pricing data that comes off the public tape, the data that crawls along the bottom of the screen on Bloomberg TV or CNBC (CMCSA), for example, but the much deeper data for which speed traders pay big bucks. These are the proprietary feeds that the exchanges have built over the last several years. They’re not only faster than the public feeds; they’re better, too. These feeds arrive sooner and contain more information than the public tape—including all prices being offered, not just the best ones. By law, prices must be entered into the public and proprietary feeds at the same time, but the proprietary systems process and transmit the information more quickly.
The discrepancy between public and private data feeds has spurred lots of investors to argue that the public exchanges are neglecting the public tape, especially after the Nasdaq’s public tape broke in August, causing the exchange to shut down for three hours.
While White has made improving market structure a major priority during her first months as the market’s top regulator, markets keep giving her reasons to believe they need help. The Nasdaq outage was just the most egregious failure of the last year. The markets have been getting glitchier by the day. It’s hard to say whether giving the public access to the types of data speed traders get will help smooth things out, but it can’t hurt. Just don’t try to ingest it all at once.