Exchanges to Ask SEC to Delay Audit-Trail Deadline
U.S. stock and options market operators and an industry regulator plan to ask the Securities and Exchange Commission to extend the deadline for when they must submit a plan for a comprehensive market oversight system.
The so-called consolidated audit trail, one of SEC Chairman Mary Schapiro’s flagship projects, would track all securities orders and trades in the U.S. from start to completion and give the agency and other regulators a powerful system to monitor the markets. The exchanges and Financial Industry Regulatory Authority said they would seek an eight-month delay to December from April next year, according to a document they published on a website devoted to the initiative on Nov. 29.
The group said it wanted a later deadline because of the “significant work and analysis that is required,” the document said. It proposed a new timeline for construction of the consolidated audit trail, or CAT.
“The delays that are being asked for are valid since it is a heavy lift with a lot of nuances and moving parts,” Edward Boyle, a former executive at trading firm Getco LLC who earlier ran the U.S. options business at NYSE Euronext (NYX), said in an e- mail. “If we don’t allow the time for all participants to be ready, it will fall short and likely never be done properly.”
The agency, which adopted a rule requiring exchanges to develop the consolidated audit trail in July, has said it will help regulators probe for market manipulation, improve their enforcement work and identify the causes of market disasters like the May 6, 2010, flash crash in which the Dow Jones Industrial Average briefly fell 9.2 percent. There are 13 equity exchanges, 10 options markets and more than 200 broker-dealers that execute stock trades away from public venues.
The SEC proposed the CAT program within weeks of the flash crash. John Nester, a spokesman for the SEC, declined to comment about the request for a delay.
Dozens of economists, financial professionals and data technicians spent four months in 2010 after the flash crash collecting and combining disparate data streams and order information to analyze “just a few hours of trading on a single day,” Schapiro said in July. That crunch gave rise to the audit trail proposal.
The system will also help regulators study how the activity of high-frequency traders affects the “quality and fairness” of markets, she said.
The U.S. has never had a system that tracks stock and option orders from cradle to grave. The SEC began a market oversight and surveillance system, known as MOSS, in the early 1980s because legislators were concerned that exchanges were failing to do an adequate job monitoring trading, Edward Kwalwasser, New York-based senior counsel at Proskauer Rose LLP and a former New York Stock Exchange and SEC official who worked on MOSS, said in a phone interview in July.
The pilot program was dropped when exchanges and the predecessor organization to Finra established methods to share information and meet surveillance duties such as monitoring for suspicious activity and pursuing insider trading. Finra oversees more than 4,300 U.S. brokers.
The SEC said in July its initial estimate that the audit trail would cost $4 billion to build was no longer valid because the requirements had changed after they were proposed and the project could rely on existing data systems, which would save money. The agency put off an analysis of the costs and benefits until after the exchanges and Finra submit their plan.
The document from the group of so-called self-regulatory organizations, or SROs, said the plan must be guided by the need to build a comprehensive audit trail with reporting requirements and technology that reflect current trading practices. The system must be able to handle increased volume, it said.
“The costs of implementing and operating the CAT should be minimized to the extent possible,” with industry feedback taken into account, the document said. “Existing reporting structures and technology interfaces will be utilized where practicable.”
The SROs will publish a document this week to get feedback on the feasibility and costs of the reporting requirements being considered. The group is assessing whether to accept separate bids for the administration and “processor/repository” duties involving data handling and storage for the audit trail, it said. The firms will issue an official request for bids in mid- February, the group said.
A meeting will be held in downtown Manhattan on Dec. 10 to discuss the document being released this week, the group said.
The exchanges and Finra have a governance committee that’s drafting the audit trail plan, a group examining costs and funding, and a technical unit. It also has committees focused on outreach and the expansion of the system to other products.
Incoming SEC Chairman Elisse Walter, who said in July she “wholeheartedly and unreservedly” supports a comprehensive audit trail, voted against the CAT rule, saying it didn’t go far enough. She sought a more “prescriptive” system and one that would track orders in real time instead of requiring data to be submitted the next day, she said. Walter criticized the way orders would be tracked, how customers would be identified and the standards to ensure the data gathered would be accurate.
The SEC approved the audit trail in a 3-2 vote. Republican Commissioners Troy Paredes and Daniel Gallagher voted with Schapiro, a political independent appointed by President Barack Obama, while Luis Aguilar sided with fellow Democrat Walter.
The SEC is improving its oversight capabilities through two other projects. It began implementing a system this year to collect real-time quote, order and transaction data generated by companies such as NYSE Euronext, Nasdaq OMX Group Inc. (NDAQ) and CBOE Holdings Inc. (CBOE) and sold to banks and high-frequency traders. Tradeworx Inc., a high-frequency firm and technology vendor, is providing the platform to compile the data.
A system to allow regulators to track activity by the largest traders is also being instituted. The rule, expected to apply to about 400 firms, according to the SEC, requires traders meeting the specified threshold to register with the agency and use an identification code when they trade through brokers. People or companies that trade at least 2 million shares or $20 million of securities in a day, or 20 million shares or $200 million in a month, are covered by that rule.
“CAT is a massive project but the SEC is already managing to collect a lot more data so they can understand what’s happening in the market and conduct investigations more quickly,” Reena Aggarwal, director of the Georgetown Center for Financial Markets and Policy at Georgetown University in Washington, said in a phone interview. “This way the commission can react immediately rather than wait months to get the data and then analyze it.”
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