The U.S. Securities and Exchange Commission’s plan to force financial firms to spend as much as $4 billion a year tracking equity orders and trades is too expensive and doesn’t need to gather data in real time, according to a former Nasdaq OMX Group Inc. executive.
The SEC on May 26 proposed requiring brokerages and exchanges to provide data on U.S. stock and options trading to a single place. All transactions would include an identifier so regulators could track who executed the trade and follow the order as it was routed from venue to venue.
Chris Concannon, a partner at electronic market-making firm Virtu Financial LLC who left Nasdaq in 2009, says the SEC’s plan is too ambitious. Regulators announced the project after the May 6 crash that erased $862 billion of value from U.S. stocks in less than 20 minutes and spurred a review of as many as 10 terabytes of trading data.
“Every order placed in the market should be captured and surveilled, but you can’t do it in real time,” Concannon, who oversaw transaction services at New York-based Nasdaq, said of the proposal known as the consolidated audit trail during an interview yesterday. “I don’t know how you get to $4 billion.”
Implementing the audit trail and creating a data repository will cost exchanges and brokerages $4 billion the first year, and about $2.1 billion annually thereafter, according to the SEC proposal on May 26. Brokers face the biggest burden, accounting for more than 90 percent of the expenses, the SEC said.
17 Million Trades
There were more than 17 million trades between 2 p.m. and 3 p.m. in New York on May 6 and 10.3 billion shares of NYSE stocks changed hands that day. By contrast, 600 million shares traded on the Big Board in the crash of 1987, the May 18 report said.
In proposing the system, SEC Chairman Mary Schapiro said it will allow the SEC “to rapidly reconstruct trading activity and to quickly analyze both suspicious trading behavior and unusual market events.” She added that the need for such a system is “intense.”
The commission is seeking comments on ways to lower the costs. If the proposal is approved, the Financial Industry Regulatory Authority, which oversees nearly 4,700 brokers, and exchanges would have 90 days to propose an implementation plan. The SEC said it “ultimately intends” the new audit trail to include other assets such as corporate bonds, municipal bonds and credit-default swaps.
“The SEC itself has almost no surveillance capabilities,” Robert Colby, counsel at Davis Polk & Wardwell LLC, a Washington law firm, said at a conference yesterday about exchanges and trading arranged by Sandler O’Neill & Partners LP in New York. The agency has historically relied on the exchanges to monitor trading on their own markets with oversight of the venues by the agency, he said.
Trading in U.S. equities now takes place across more than 50 venues as competitors to the New York Stock Exchange, operated by NYSE Euronext, and Nasdaq have emerged. Markets are also electronic and faster, making it easier for traders engaged in stock manipulation to try to hide their activity across venues and through different brokerage accounts.
Two audit trails, which are not uniform or coordinated, exist for Nasdaq and NYSE stocks. Richard Ketchum, chief executive officer of Washington-based Finra, said his agency plans to combine this data and expand it to include information that is currently not being captured.
‘Very Different World’
That order data is “not meant to be real time,” said Colby, who worked at the SEC for 27 years, most recently as deputy director of the agency’s division of trading and markets. It will be a “very, very different world” when the SEC can capture this information, he said. Regulators “will be able to understand a great deal more clearly what trading is like.”
The “feasibility” of doing this in real time could be an issue, said Sapna Patel, head of market structure and liquidity strategy for the Americas at Morgan Stanley in New York. While a consolidated audit trail is an important tool for regulators, “the real-time aspects of collecting and providing this amount of information and data could be onerous from an implementation standpoint,” she said.
Having instant access to the audit data isn’t necessary because legal action can take weeks if not longer, said Concannon, who worked at the SEC for three years in the mid-1990s. If regulators uncover what they suspect is manipulation, they’d likely have to re-run programs that search for suspicious trading patterns, look for the same behavior in different companies or examine whether the firm engaged in strategies at certain times such as the close of the day, he said.
“They’re building a real-time system to be used by an agency that can’t act in real time,” he said. “They should build a system, but it doesn’t have to be in real time.”