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SEC proposes high-frequency trade oversight rules

May 26, 2010, 1:02 p.m. EDT

http://www.marketwatch.com/story/story/print?guid=A5B29651-D985-42C8-ADEC-6668BCCDB7B5

SEC proposes high-frequency trade oversight rules
Exchanges would have to 'tag' trades, provide data to repository for review
By Ronald D. Orol, MarketWatch

WASHINGTON (MarketWatch) -- Nearly three weeks to the day after a massive plunge in stocks that left investors shocked, the Securities and Exchange Commission voted to propose rules that would give the agency and securities exchanges more timely information about high-frequency trades so they can better oversee the markets.

'These costs will be substantial. The benefits will be substantial .'

Kathleen Casey, SEC commissioner

The proposal adopted unanimously by the five commissioners Wednesday requires exchanges and broker-dealer firms that trade on the exchanges to provide detailed information about quotes, orders and trades to what would be a newly created central repository.

The measure comes partly in response to a stomach-churning intraday swing that saw the Dow Jones Industrial Average drop nearly 1,000 points on May 6 before swiftly recovering to a 348-point loss. A total of 19 billion shares were traded that day on multiple exchanges, each with its own -- sometimes incomplete -- approach for collecting data.

SEC Chairwoman Mary Schapiro said that May 6 underscored deficiencies in the commission's ability to have the pertinent data at hand to exercise its mandate for oversight.

"The SEC's efforts to reconstruct the trading on that day are substantially more challenging and time consuming than we would have liked because no standardized, automated system exists to collect data across the various trading venues, products and market participants," Schapiro said.

Schapiro acknowledged the rules the SEC's proposing are a way to come to grip with rapid technological advances in investing -- where trades are transacted in milliseconds -- that have made it far more difficult for the agency and exchanges to supervise trading activity.

"This information is designed to allow regulators to more easily and quickly identify potentially manipulative activity occurring across markets and through multiple accounts at multiple broker-dealers," said Schapiro.

More information, please

Exchanges and broker-dealers would be required to provide trade information to the central repository in real time or close to real time, according to the SEC's proposal. The proposal would require exchanges to be "hooked up" to the system within a year of its approval.

Broker-dealers would need to be set up within two years. However, the SEC's also considering an expedited approach that is smaller in scale.

Broker-dealers would be required to "tag" each order they are making to buy a security that the exchange would need to report to the central repository. Exchanges would also have to tag each order received by a member of the exchange, and that information would also need to be reported to the repository.

In essence, the agency would seek to follow the trade from its inception to completion.

Commissioner Kathleen Casey said that she's supportive but that the benefits wouldn't come without incurring costs.

"These costs will be substantial. The benefits will be substantial," she said.

Echoing Schapiro, commissioner Elisse Walter said that SEC's efforts to collect data in the aftermath of May 6 have demonstrated that regulators are not prepared.

"Valuable resources are wasted and time is lost when our staff is sent to track down disparate information from disparate sources," she said. "A consolidated audit trail would have enhanced our ability to understand what happened on May 6."

Commissioner Luis Aguilar questioned, however, whether the SEC would have the human and technological resources to evaluate the projected 100 gigabytes of data expected to come in daily to the repository. He made a plea to Congress to approve a measure approved by the Senate that would allow the SEC to be self-funded, a provision that would significantly increase the agency's annual budget.

"The SEC's staff must be equipped with the best resources to do the job," Aguilar said. "Most Americans assumed the SEC has these tools. It is shocking that the SEC does not have its own access to this data.

"The SEC must have this data and the tools to identify egregious conduct, identify trends and reconstruct market movements."

He also argued the SEC should require that over-the-counter derivative transactions to be tagged and added to the repository. The proposal doesn't cover this category of transactions.

"It is imperative for financial derivatives and over-the-counter securities," he said.

Also in response to the plunge, the agency and securities exchanges are proposing to create a market-wide circuit breaker for all exchanges -- including electronic exchanges -- to halt or slow down the pace of trades during a major market downturn.


Copyright © 2010 MarketWatch, Inc. All rights reserved.

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oh my .. maybe that little *experiment* had some unintended
consequences after all

it's about damn time .. after all it's only 2010 ~

at least they didn't ask for *commentary* but they still
leave plenty of *loopholes* to exploit .. i'd have expected
nothing less at this point in time

hmmm

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4kids
all jmo