(Bloomberg News) 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 advisor 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.