Electronics, surprise, keep getting cheaper. A hard drive that stores a trillion numbers and slips into a briefcase costs $200. A desktop version costs less than $100.
Meanwhile, electronics are spurring huge growth in trading. In 2005, the New York Stock Exchange traded 2 billion shares a day. Now, 10 billion shares a day across a burgeoning number of electronic exchanges is commonplace (Data Sweep, October 5, page 22).
The surge largely is driven by high-frequency trading, made possible by swifter circuitry and smarter software.Algorithms set limits and automatically generate hundreds or thousands of orders in a second.
It's impossible to eyeball what's going on, anymore. If you want to understand what's happening, you have to do it electronically.
So if you're Mary L. Schapiro at the Securities and Exchange Commission, trying to (a) protect investors and (b) maintain fair and orderly markets to (c) facilitate capital formation in a badly bruised economy, the equation looks pretty simple.
All markets soon will be all electronic all the time.
And surveillance will have to be electronically-powered, all the time.
The time has come for a single central database that immediately sucks in and stores records of all trades of all instruments on all markets. Period.
It's not that hard. Fidessa Group on the other side of the pond pulls in the raw trade data for the stocks in all major European indices for a free service it calls the Fragulator. This lets securities firms see how fragmented trading in a stock is, before launching buy and sell orders. It's pulling in a billion records a year from 40 feeds, just on equities. It's considering making the raw data available to investors-and regulators. How much storage is required for each billion records? 200 gigabytes. How much data from 100 venues has built up over many years in its ticker plant? Eight terabytes. How much would a 10-terabyte hard drive cost, to put at your desk? $1,650.
At the annual meeting of the Securities Industry and Financial Markets Association on Tuesday, S.E.C. chairman Schapiro said her agency relies heavily on the exchanges themselves for data, when it wants it, and the work of the multiagency Intermarket Surveillance Group to make sure sufficient data is available. As for creating a single database of all trades in all instruments on all venues so the agency, at will, could mine data, search for patterns and do whatever analysis is needed to protect investors and foster healthy capital formation? "That work is underway,'' she said. But, she added, "I have no idea where we are right now on that."
The next day, New York Senator Charles Schumer sought assurance from James A. Brigagliano, co-acting director of the S.E.C.'s Division of Trading and Markets, that the taxpayer-supported securities regulator was pursuing "fully consolidated market surveillance across all markets."
Brigagliano hesitated. He said it was an "important element" of increasing the agency's "ability to avoid missing something." But, when pressed basically for a clear commitment to consolidation, the answer was "we are absolutely moving to consider that."
Thankfully, there's another regulatory body ready to create the consolidated database right now and act, if need be, as the "single set of eyes" examining and analyzing trade information for red flags. This could be to see if a broker is trading in a stock for its own account just before doing it for a customer (front-running) or, theoretically, if customer account records are required to be pulled into the consolidated database, whether trades recorded on a customer statement match up with any trades actually made (see "How Bernie Made Basket Cases Out of His Customers' Accounts," page 16).
This would be the Financial Industry Regulatory Authority, which-at the same SIFMA meeting where Schapiro spoke first-called for creation of a single repository of data on all trades on all markets so that the financial industry could be "surveilled by a unified single regulator."
"If you don't, things will fall through" the cracks, said Rick Ketchum, chairman of the industry-funded regulator.
Like the Fragulator, Ketchum's database would include trades in both dark (closed) and lit (public) markets. It would identify actual participants in each trade report. The cost would "not be exceptional,'' he said. And its creation does not require new legislation.
Confidence in the fairness of markets would be reinforced by providing one, single platform for surveillance of front-running, abusive short-selling and market manipulations still to be imagined and executed.
It's a decision, he said, that largely "has to be made by individual exchanges."
That may be a tall order. But, if markets want to keep orders flowing, it's a decision they should unite behind.
Before Sen. Ted Kaufman (Last Word, p. 22), Schumer or Schapiro, who promise more reform is on its way, take matters into their own hands.
This article can also be found at SecuritiesIndustry.com.
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