The U.S. Patent & Trademark Office is expected to award a patent Tuesday to a financial technology firm for a cloud computing system that allows securities firms and, potentially, regulators to manage market-wide risks up to the millisecond, without adding any delay to transactions as they are executed.
Patent No. 7,778,915 for a "Financial Data Processing System" that provides real-time risk management and surveillance to FTEN, a New York technology firm whose risk software monitors 17 billion shares worth of transctions, daily.
FTEN chief executive Ted Myerson has contended the system can, if used widely, counter the risks and concerns surrounding high-speed electronic trading. High-frequency trading now accounts for roughly two-thirds of all trading in equities in the United States, on a typical day.
“Liquidity destinations are where the natural consequences of people's actions occur, so looking anywhere else to try to reconstruct results is impractical, inefficient and unrealistic,” Myerson told Securities Technology Monitor this week.
The system works by collecting data in real time on transactions executed by various trading venues, normalizing the data, mapping it to the associated trading entity, updating the positions of each entity instantly and ultimately evaluating the impact of each transaction on the entity’s account, in real-time.
The system also keeps track of the various firms that are financially liable for each identified transaction.
Securities firms and regulators can define criteria by which they want to sift the data, as well.
FTEN first filed its application for the patent in 2003. The system is an example of “cloud” computing, where market participants and regulators get access to a shared, secure pool of data. The information resides in many locations and gets updated constantly.
This system could be used to deal with risks of so-called “sponsored participants” to markets, who are not registered entities but using electronics to gain direct access to venues, Myerson and FTEN chief corporate development officer Gary LaFever suggested in an exchange with Securities Technology Monitor.
On January 13, the Securities and Exchange Commission proposed a new rule that will effectively prohibit broker-dealers with market access from providing customers with unfiltered access to an exchange or alternative trading system (“ATS”).
As reported last week by Securities Technology Monitor, FTEN also said its technology could be used "capture order and execution data in real-time" from stock exchanges, electronic communication networks, alternative trading systems and dark pools to start creating a consolidated audit trail, as proposed in May by the SEC.
In its May proposal to create a consolidated audit trail, the SEC proposed introducing a purpose-built system that would cost $4 billion to set up and $2.1 billion a year to maintain. FTEN and other commenters say they can set up an effective system that is more on the order of $100 million up front and $100 million a year.
LaFever also said the system was built with a market disruption like the May 6 “Flash Crash” in mind.
On that date, LaFever was waiting in the Rayburn House Office Building to meet with two senior policy advisors on the House financial Services Committee, Katheryn Rosen, a Democrat, and Kevin Edgar, a Republican, about managing systemic risk in capital markets.
Soon after the meeting started, Edgar turned his phone toward LaFever and asked if "FTEN could have prevented this?"
The Dow Jones had dropped 998.5 points. LaFever’s response: "our system was designed to prevent such events from happening and if it did not prevent it then it would provide real-time transparency and awareness into what had happened."
FTEN’s “Financial Data Processing System" pulls in market data on equities, options, futures, foreign exchange and fixed-income transactions.
The data that gets collected can be sorted by a Market Participant Identification code, account code, terminal identification, order identification, system identification and other street identification notations.
Among the risks the system can check for are: a short sell trade in a hard-to-borrow security; a quantity limit in a hard-to-borrow security; a restricted security; a single order quantity limit; a single order value limit; a short sell trade; a buying power limit; sale of stock without inventory; a realized profit; a realized loss; an unrealized profit and an unrealized loss.
This story originally appeared on the Securities Technology Monitor web site.
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