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Consolidated Audit Trail on SEC Agenda, Once Again
July 10, 2012
[ by Howard Haykin ]
The SEC meets on Wednesday to vote on a consolidated audit trail proposal. The long-standing proposal, issued shortly after the dramatic Flash Crash of May 6th, but since then has been collecting dust on Mary Schapiro's credenza. The thought of there being a single system to track all order and trading data has been a "pie in the sky" desire of securities regulators, but the stumbling block seemed to be the cost - it would take perhaps tens billions to develop such a system - which prompts these queries:
Why is the SEC considering the costly consolidated audit trail? And why now?
Perhaps the SEC has a rich uncle who died and left the huge inheritance to the agency. Or maybe, Congressional leaders are finally ready to cut ties with Wall Street, which has shocked or crippled the world's economy once too often and the SEC is viewed as the "lesser of two evils" and thus deserving of an unlimited spending budget. A Trail With a Wide Span. The so-called consolidated audit trail will encompass 13 equity exchanges, 10 options markets and more than 200 broker-dealers that execute stock away from public venues. It will be capable of reconstructing events that took place on any given trading day - especially following a market crises. It's reported that momentum for the proposal increased after the SEC and the CFTC spent 5 months to complete a report on what actually caused the May 2010 Flash Crash. While the CFTC needed several weeks to compile its data, a 20-person SEC team spent 3 months collecting, cleaning and processing data from exchanges and brokers because it lacked uniform quotes and trade data, according to Gregg Berman, senior adviser to the director of the SEC’s division of trading and markets. Reaction From Those on the Street. "This is very significant," said Edward Kwalwasser, a New York-based former NYSE and SEC official, and currently senior counsel at Proskauer Rose LLP. Back in the early 1980's, Ed Kwalwasser had worked the SEC's market oversight and surveillance system - aka MOSS - and he fondly recalled the obstacles that existed then but not now: "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 track the markets and monitor trading using data collected in different formats. But as proposed, there would be a single consolidated audit trail, with data maintained in a centralized hub that captures "customer and order event information" throughout the life cycle of a transaction. One wishlist item in the earlier proposal had to be dropped in February - programming the system to submit data to the repository in real time. That was simply too expensive and relatively unnecessary for enforcement actions that may take weeks to conduct.
If adopted, the proposed rule would require each exchange and FINRA 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. Once the exchanges and FINRA present their national plan to establish an audit trail, it will be up to the SEC to give final approval. When the 2010 proposal was drafted, the SEC estimated that it would cost $4 billion to set up the central repository and its related feeder systems. Another $2.1 billion would be need to run and maintain the systems annually. Of course, times have changed and the SEC would need to reassess those numbers with a sharp pencil.Plan’s Roots. The concept originated in 1980, when Congress authorized $12 million for the SEC to build a computer system to oversee markets because legislators were concerned that exchanges were failing to do an adequate job monitoring trading. That pilot program was dropped when exchanges and the NASD established methods to share information and meet surveillance duties - e.g., monitoring for suspicious activity and pursuing insider trading.
FINRA, Nasdaq Volunteer. FINRA and Nasdaq OMX Group each told the SEC last year that they could be the technology provider for the audit trail. FINRA gave the SEC a blueprint in April 2011 for the process it would use to build the record-keeping system on top of its current order audit trail system, or OATS. Implementing the system for equities would cost no more than $125 million, FINRA said, not including the cost of integrating options, bonds, swaps and other products. Nasdaq OMX advised the SEC in November 2011 not to "lower its expectations" by turning to a system such as OATS that doesn’t meet the agency’s needs. The exchange operator said it could build the system the SEC envisions. The exchanges and FINRA will be responsible for selecting the technology provider or plan processor that would operate the repository for the audit trail data, the SEC said in 2010. In any case, imagine the number of jobs that entire project might create. For further details, go to: [Bloomberg, 7/9/12].Related Stories: Archive
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