The U.S. Securities and Exchange Commission took a step toward improving its oversight of equity and options markets, contracting for a system that collects quote and trade data sold mainly to private users.
Regulators will be able to tap into real-time feeds of orders, quotes and transactions that are generated by exchange companies such as NYSE Euronext and CBOE Holdings Inc. and were, until now, used primarily by banks and automated trading firms. Tradeworx Inc., a high-frequency firm and technology vendor in Red Bank, New Jersey, is delivering a platform to compile the data under an SEC contract.
“Historically we have not had the most robust systems to do the analysis one would want to do with data,” Gregg Berman, senior adviser to the director of the SEC’s division of trading and markets, said in a phone interview. “In one fell swoop we have become one of the most advanced institutions in terms of our technical and analytical capabilities.”
The initiative is separate from a broader market oversight project known as the consolidated audit trail that SEC commissioners voted to mandate last week. That plan, years away from implementation, will let regulators monitor an order’s “life cycle,” including information circulated before it gets to an exchange or another venue, or is canceled. The project, which will capture information the morning after it occurs, will also identify the firms making trading decisions.
“The consolidated audit trail is going to take a huge amount of money and much longer to implement,” Reena Aggarwal, director of the Georgetown Center for Financial Markets and Policy at Georgetown University’s McDonough School of Business in Washington, said by phone. “This will give the commission a huge capability in terms of monitoring the markets in real time. That has been severely lacking in this age of speed.”
The fee for the market-data system is $2.5 million for the first year, Manoj Narang, the chief executive officer of Tradeworx, said in an e-mail.
The SEC will have access to the quote and transaction data used by algorithmic traders, high-frequency firms, electronic market makers and other professionals who buy and sell rapidly across venues, Berman said. It will be able to run analyses on the information to search for potentially harmful or suspicious activity and trading patterns that can help it gain a better understanding of how rules affect the marketplace, he said.
Securities Technology Monitor, a trade publication, first reported the SEC’s selection of Tradeworx for the platform.
“It sounds like a front-line tool to get some visibility into what’s happening across the market,” James Overdahl, a vice president at NERA Economic Consulting and a former chief economist at the SEC and Commodity Futures Trading Commission, said in a phone interview. “Part of this could be a vetting process for looking at tips about allegedly abusive trading practices to see if there’s any substance to the allegations.”
It made sense for the SEC to rely on individual venues to monitor trading when the New York Stock Exchange and Nasdaq Stock Market dominated buying and selling in their stocks, Overdahl said. Now, with more than 50 equity venues available to investors and traders, it’s harder for regulators to assess activity dispersed across them, he said.
The SEC’s new tools, when implemented later this year, may help regulators understand activity such as the price swings in International Business Machines Corp., McDonald’s Corp. and Coca-Cola Co. that repeated every hour yesterday. Shares in the companies, three of the biggest in the Dow Jones Industrial Average, swung below successive lows and highs in intervals that began near the top and bottom of each hour, data compiled by Bloomberg show. While only IBM finished more than 1 percent higher, the intraday patterns weren’t accompanied by any breaking news in the three companies, where $3.42 billion worth of shares changed hands.
The data tools may be used by as many as 100 people at the agency, the SEC said in its initial specifications report. The commission may generate hundreds of daily queries about trading activity, it told vendors in response to questions last year. It asked companies submitting bids to ensure that data feeds from the futures markets could be integrated into the system.
Under the program, real-time trade and so-called depth-of-book data will be collected from all 13 U.S. stock exchanges and the Options Price Reporting Authority, according to the SEC’s specifications. Depth-of-book data refers to quotes and orders at prices inferior to the best levels on each market and includes the number of shares or contracts available at those prices. Public quote and trade data will also be captured.
The SEC said last year it wanted the ability to analyze data at intervals such as 1 thousandth of a second, 1 second or 1 minute. The SEC’s division of trading and markets and the division of risk, strategy and financial innovation will use the system, the agency said.
The data captured will be used to focus on the impact of high-frequency trading, the consequences of high rates of order cancellations, connections between activity in exchange-traded products and individual stocks, and the effects of SEC or exchange rules on the marketplace, Berman said. A team of employees from different SEC divisions will monitor and analyze the markets using the market-data tool, he said.
The bigger consolidated audit trail project requires U.S. securities exchanges and the Financial Industry Regulatory Authority, which oversees 4,400 brokers, to establish a system to reconstruct market crises and expedite surveillance across 13 equity exchanges, 10 options markets and more than 200 broker-dealers that execute stock trades away from public venues. The effort, like the newer market-data plan, is part of the agency’s response to the May 6, 2010, stock rout that temporarily erased $862 billion in U.S. equity value.
The SEC initially said the audit trail would amass real-time data about orders generated. It dropped the requirement earlier this year after brokers and exchanges complained the cost outweighed the benefits. SEC Commissioners Elisse Walter and Luis Aguilar, who opposed the measure in a 3-2 vote on July 11, said it didn’t go far enough.
“Not striving” for a real-time reporting regime “seems to ensure that the industry remains one step or one day ahead of the regulators,” Walter said at the July 11 meeting.
Regulators and analysts at the SEC will use the new market-data system in conjunction with the consolidated audit trail, Berman said. The audit trail will include customer data for trades and orders that aren’t currently available in existing information feeds, he said.
“To the extent we need to do real-time analysis, we’ll do real-time analysis,” Berman said. “Once the consolidated audit trail is in place, we can follow the life cycle of the event that we think might have been an issue. For some types of analyses, we need the consolidated audit trail as a first stage.”