(Bloomberg News) The 32-year wait for a comprehensive record-keeping system to monitor trading across U.S. equity and options markets is approaching conclusion.
The Securities and Exchange Commission is meeting tomorrow to consider adopting a proposal issued three weeks after the stock rout of May 6, 2010, to build a single system to track all order and trading data. The so-called consolidated audit trail will enable the reconstruction of market crises and analyze trading on 13 equity exchanges, 10 options markets and more than 200 broker-dealers that execute stock away from public venues.
Momentum for the proposal increased after it took the SEC and Commodity Futures Trading Commission five months to complete a report on what became known as the flash crash, in which the Dow Jones Industrial Average briefly plunged 9.2 percent. While the CFTC needed several weeks to compile its data, a 20-person SEC team spent three months collecting, cleaning and processing data from exchanges and brokers because of a lack of uniform quotes and trade data, according to Gregg Berman, senior adviser to the director of the SEC's division of trading and markets.
"This is very significant," Edward Kwalwasser, New York- based senior counsel at Proskauer Rose LLP and a former New York Stock Exchange and SEC official who worked on the commission's market oversight and surveillance system known as MOSS in the early 1980s, said in a telephone interview. "When we did MOSS the technology wasn't available to accomplish our ends. Today it clearly is. This will give the SEC a real running start in being able to surveil all the markets in a fair way."
Monitoring Trading
Regulators currently keep tabs on the markets and monitor trading using data collected in different formats. The consolidated audit trail would be a centralized data hub that captures "customer and order event information" throughout the life cycle of a transaction, according to the proposal. An aspect of the plan requiring data to be submitted to the repository in real time was dropped in February after exchanges and brokerages said it would be too costly and unnecessary for enforcement actions that may take weeks to conduct.
The SEC will consider issuing a rule tomorrow instructing the exchanges and Financial Industry Regulatory Authority, which oversees about 4,400 brokers, to "develop, implement and maintain a consolidated audit trail" for all equity securities and options, according to a notice from the agency released July 6. The system will collect data "across all markets, from the time of order inception through routing, cancellation, modification or execution," according to the statement.
Plan's Roots
The roots of the plan go back to 1980 when Congress authorized $12 million for the SEC to build a computer system to oversee markets because legislators were concerned exchanges were failing to do an adequate job monitoring trading, Kwalwasser said. 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.
"With the grilling the SEC took in front of Congress after the flash crash, they didn't want to have to rely on anybody else -- they wanted to get information that was as complete as possible themselves," Kwalwasser said. The SEC is pursuing a consolidated audit trail without claiming that the exchanges "haven't lived up to what they're supposed to do, even though trading has become harder to track," he said.
Market Fragmentation
The supervision of equity and options markets has exploded in complexity since the 1980s as regulations led to more venues competing for quotes and trades while exchanges and Finra installed systems to assemble order and transaction data for the products they oversaw such as stocks listed on NYSE or Nasdaq. Abusive trading dispersed across multiple venues became harder to track than when activity was centralized in one place. The New York Stock Exchange accounted for 22 percent of trading in the companies it lists last month, compared with 87 percent in 1980, according to data compiled by Bloomberg and NYSE.