U.S. regulators implementing a sweeping project to monitor securities trading should discard overlapping systems designed to capture similar data, according the Securities Industry and Financial Markets Association.
The Securities and Exchange Commission should end its Electronic Blue Sheets system for collecting trading information from brokers and exchanges and its Large Trader Reporting system, approved in 2011 as a way to compile data on the 300 biggest market participants, Sifma said in a paper published on its website today. The Financial Industry Regulatory Authority, which oversees almost 4,300 brokers, should also end its Order Audit Trail System, in place since the late 1990s, Sifma said.
The planned consolidated audit trail, or CAT, one of former SEC Chairman Mary Schapiro’s main projects, will track all securities orders and trades in the U.S. from start to completion and give the agency and other regulators a system to monitor markets, pursue abusive behavior and reconstruct crashes. The exchanges and Finra said in November they would submit the plan to develop the system in December 2013, eight months later than initially expected.
The money it will take to comply with overlapping reporting requirements “not only complicates the task of sound regulation, but also serves as a tax on the industry that can increase costs to the investing public, reduce shareholder value and reduce the competitiveness of U.S. markets,” Sifma wrote in the report, co-authored with International Business Machines Corp., which was engaged as a consultant for the study.
The trade group said it supports the construction of a consolidated audit trail, which it expects to improve regulators’ oversight and boost confidence in markets. It wants to ensure that brokers, banks and other Sifma members have a voice in the development of the oversight system, according to Tom Price, managing director and head of operations and technology at Sifma.
“This is an opportunity once and for all to clean up some of the disparate reporting rules in the system and to create one infrastructure to capture the information in a single place,” Price said in a phone interview. “This is a monumental game-changer of regulatory reporting for our industry. This computer will be one of the largest computers in the world in the amount of information it will carry on every quote, every trade and every modification for every customer.”
Additional oversight systems that should be eliminated when the consolidated audit trail comes into effect are the Consolidated Options Audit Trail System, the Large Options Position Reporting and the National Securities Clearing Corp.’s equity cleared reports, the Sifma paper said.
Ending duplicate reporting requirements will allow brokers and regulators “to tap into a pre-existing source of funding for the CAT,” according to Sifma. The capital and resources that are freed up can be used to update brokerage systems to comply with the new requirements, it said.
The exchanges and Finra have not outlined the costs to build the oversight system or spelled out what portion should be paid by exchanges and broker-dealers. The SEC said last year that its initial estimate of $4 billion to build the system was too high because the requirements changed after they were first proposed.
Google Inc., Infosys Ltd., IBM, Finra, NYSE Euronext, Nasdaq OMX Group Inc. and Bats Global Markets Inc. said earlier this month they would submit bids to build the audit trail. Technology providers Tradeworx Inc., Cinnober Financial Technology AB and MillenniumIT, owned by the London Stock Exchange Group Plc, were also among the 31 bidders, along with SunGard Data Systems Inc. and Sapient Corp.
The administration of the consolidated audit trail should be centralized under a single entity to reduce costs, according to Sifma. The group said part of the project should be paid for with some of the hundreds of millions of dollars in revenue the exchanges get annually from the sale of market data. The SEC refers to exchanges as self-regulatory organizations, or SROs.
“We laid some markers down conceptually about how we view this,” Price said. “The industry shouldn’t bear the entire cost of this. For-profit entities that have SRO responsibilities and the industry will have to bear the cost.”
The exchanges and Finra generated $464 million in revenue in 2008 from the sale of public quotation and transaction data to brokers and vendors such as Thomson Reuters Corp. and Bloomberg LP, the parent of Bloomberg News, according to an SEC paper published in 2010. Net income from selling the information was $449 million, the data showed. Exchanges also sell private data feeds to brokers, vendors and trading firms.
The discussion about costs comes as more volume is moving away from exchanges. More than 36 percent of U.S. equity shares changed hands off exchanges this year, compared with 32.8 percent last year, according to data compiled by Bloomberg.
Broker-dealers will incur costs to support the reporting requirements across trading, order-routing, order-management, compliance and risk management areas, the report said without estimating how much that would total. They will have to invest in new technology infrastructure, devise new ways to transmit and track data, build new software interfaces, develop surveillance and reporting protocols, and hire people, it said.
The organization that manages the audit trail should run the system at a “cost recovery model” given the system’s role as an “industry utility supporting regulatory and reporting and oversight,” Sifma said. The terms of the business model should be set by the exchanges, Finra and the project’s advisory committee including broker-dealers, the group said.
The current timeline for large broker-dealers to report data to the audit trail may need to be amended, Sifma said. Brokers won’t have enough time to finalize the building and testing of their internal technology systems by December 2015, the current deadline for bigger brokers, it said.
“We want to make sure there’s minimal disruption to existing processes and systems in the marketplace and we have industry participation,” Price said. “The ultimate goal is to enhance public trust and confidence in the public markets.”