Let There Be Light in U.S. Markets
Renewed volatility in the U.S. stock market raises a question: If a freak event like the 2010 “flash crash” occurred again, would regulators have a better view of what was happening than they did back then?
Not really. And therein lies a crucial challenge for the Securities and Exchange Commission.
Periodic market glitches show how far the speed and complexity of trading has outpaced regulators’ capacity to monitor it. Over the past decade and a half, the daily volume of trade-related electronic messages has increased dramatically -- by one estimate, 500-fold. Meanwhile, regulators still rely on an outdated patchwork of surveillance systems lacking even basic information, such as reliable time stamps and customer identification.
At best, these systems can show only a partial picture of what happened, months after the fact. One tech executive says it’s like using bicycles to catch Ferraris.
After the flash crash, the SEC proposed a solution: Record all the activity in the stock and options markets, and have the data available for analysis fast. This “consolidated audit trail” would let regulators analyze anomalies and shed light on the causes of puzzling bursts of volatility. Better understanding could lead to better system safeguards -- and more sensible policing of the markets.
The project is complex, but not mainly because it requires the processing of 58 billion records a day. The bigger problem is the number of different organizations with a stake in the outcome -- and the fact that nobody has taken charge.
Starved of funds by Congress, the SEC delegated figuring out how to build and pay for the audit trail to a group of self-regulatory bodies, including exchanges and the Financial Industry Regulatory Authority. A separate advisory committee represents market participants, who worry about costs, compliance risks and the safety of their customers’ data.
The project has wended its way through seemingly endless deliberations and approvals. A single tweak to the rules for reporting customer information took two years to be included in the audit trail plan, which the SEC has yet to approve. By the most optimistic timeline, the system won’t be up and running until late 2019. Even when complete, it won’t cover such important markets as futures and government bonds, which will require the cooperation of the Commodity Futures Trading Commission and the Treasury Department.
The U.S. would be better off with a single financial-system regulator with the resources and authority to handle marketwide projects -- but that won’t happen any time soon. In the meantime, the SEC must be more forceful. Having ordered the organizations to build the system, it must press harder for results. It should also rule on proposals faster, and remind all parties of its power to levy fines on those who dawdle.
In addition, the organizations should do what they can to ease the burden on market participants. One suggestion: Give broker-dealers something in return for paying to build and maintain the system -- such as access to data on their own operations. This would defray their record-keeping costs and give them a greater stake in the project’s success. It’s mystifying that this isn’t already part of the plan.
The SEC appears to be moving in the right direction. Chair Mary Jo White has pledged to get a final plan approved this year, after which the actual building of the system can begin. In one positive sign, the agency has appointed a dedicated program manager, who can be instrumental in speeding the process.
It’s important to avoid any further delay. U.S. financial markets can’t maintain their reputation as the world’s most reliable if the people in charge stay in the dark.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.