Calling for Action
March 8, 2010
The call was great.
"All is not as stable as it appears,'' the head of the primary self-regulating body in the securities industry said. "There are impediments to regulatory effectiveness that are not terribly well understood and potentially damaging to the integrity of the markets."
His worry was not dark pools, not flash orders, not high-frequency trading, not billion-dollar Ponzi schemes. It was the simple matter of market structure-when there are lots of trading venues. The age of electronics means just about any serious entrepreneur with backing can set one up. And find a slice of the overall market to serve.
When there was a "primary market"-the New York Stock Exchange-"there was a single price discovery market whose on-site regulator saw 90-plus percent of the trading activity,'' noted Rick Ketchum, chairman and CEO of the Financial Industry Regulatory Authority. "In its place are now two or three or maybe four regulators, all looking at an incomplete picture of the market and knowing full well that this fractured approach does not work." (See "The Will and Way to Surveill," page 23).
"This is especially true given how easy it is for market participants to move volume on a second-by-second basis between venues,'' he told an audience at the annual meeting of the Securities Industry and Financial Markets Association on October 27.
There are now, for instance, roughly 30 dark pools in this country and FINRA acts as the trade repository and regulator of dark pool activity. Yet even Ketchum says "it's not always clear what activity emanates from the pool versus what emanates from unrelated desks" coming in from firms sponsoring access to the pools.
Data quality varies, by exchange. Hiding the identity of a participant is becoming easier. "It often takes days, not minutes, to understand who traded and where,'' Ketchum said.
First, he said, you need to define the data you actually need to get, from each venue. Then, "all the data needs to be consolidated, with a single set of eyes looking at the market holistically,'' he said.
Which was the clear call to action. "The consolidated data pool should be surveilled by a unified single regulator,'' he said. "A single regulator that can bring the best technology, the best people, and a unified set of rules needs to be empowered." ("All the Data, All the Time,'' page 4, Nov. 2, 2009)
If the Securities and Exchange Commission wanted to be that single regulator, fine. If not, he stuck up his hand for FINRA to do it.
After all, what better way to patrol electronic markets than electronic systems? Get proper information instantly of all trades, backed by proper identification of all parties in trades, all in real time, and you start to have something that promises ... real-time regulation.
You could immediately see if, say, brokers were trading in stocks on their own account, before doing so shortly thereafter for their customers. Or, if you had a tip or complaint, be able to drill into the database and see if there were any trades actually being made that supported the account statements being sent out by a hallowed name in the securities industry like Bernard L. Madoff once possessed (See "SEC Boosts Tech Spending," p. 16).
