The Securities and Exchange Commission Wednesday mandated that the nation’s stock exchanges create a system to consolidate all trading data on options and stocks into a single database before the start of the next trading day.
On a three to two vote, the SEC charged the exchanges and the Financial Industry Regulatory Authority with developing, implementing and maintaining a consolidated and auditable trail of every order, cancellation, modification and executed trades on the New York Stock Exchange, the Nasdaq Stock Market and 11 other national stock exchanges, 10 options markets and through more than 200 broker-dealers.The exchanges and FINRA will have to produce a National Market System plan for the database and its operation that details both the costs and the “technological specifiscs” of its creation.
The SEC originally estimated, in 2010, that the consolidated audit trail would cost $4 billion upfront to build and $2 billion a year to operate. The costs would be picked up by the securities industry, which criticized the estimate as being unrealistically expensive.
Key to getting the costs under control were two propositions:
- Not requiring the database to operate in real-time, with orders and cancellations being captured in the microsecond they occurred.
- Using an existing system and technologies, where possible. An
oft-cited potential base would be theOrder Audit Trail System, maintained by FINRA. Since October, that system has kept track of trades on the Nasdaq Stock Market, the New York Stock Exchange, NYSE Arca, NYSE MKT, BATS Exchange and the Chicago Stock Exchange.
The rule mandating creation of the system requires “certain data,’’ not immediately specified, to be reported to the “central repository” by 8 a.m. Eastern time each morning. Stock exchanges open for operation at 9:30 a.m. each day. There is no “real-time” requirement.
All “reportable events” will have to be tagged and stored in a fashion that will allow regulators to follow an order through its entire life cycle “from generation through routing, modification, cancellation, or execution.”
The exchanges will also have to synchronize their clocks, with time stamps that work by the thousandth of a second or “finer increments.”
Eric Scott Hunsader, operator of a market data aggregator known as Nanex, said in a Web presentation that occurred while the SEC was meeting that the timing of bids and offer information across the exchanges are not in synch, currently. He presented charts that he said indicated traders were arbitraging the differences in time, buying shares on one exchange and selling them on another at a higher price, when the bids and offers should be in synch.
A system of identification codes will also keep track of who made the trades or took other actions. Each broker dealer and each national exchange will be assigned “a unique, cross-market identifier,’’ as will any customer or adviser to a customer that has “trading discretion over a customer’s account.’’
“Market activity is now measured in milliseconds and microseconds – increments so small that only the speed of light becomes a limiting factor,’’ Schapiro said Wednesday. “In addition, automation means it is not uncommon for hundreds – and sometimes thousands – of orders to be generated, modified, cancelled, aggregated, disaggregated, and routed across a dozen venues, all before even a single trade is executed.’’
This means, she said, that corralling “this vast amount of disparate data” is “central to the SEC’s ability to protect investors, and to maintain fair, orderly, and efficient markets.”
After the 2010 market disruption, it took a 20 person SEC team three months to collect and process quote and trade data that arrived in different formats from exchanges and brokers.
The SEC also has implemented circuit breakers that halt trading when a company’s shares move 10 percent in five minutes.
Still, Schapiro pressed for more tools, such as the consolidated audit trail, to allow immediate analysis of any future disruptions or anomalies.
Two Democrats on the commission, Elisse Walter and Luis Aguilar, opposed the plan, saying it does not go far enough. Schapiro, Troy A. Paredes and Daniel M. Gallagher, voted for the measure.
How long it will take the nation’s exchanges and FINRA to develop a plan to create the system is not known. The SEC must approve the plan before it can be implemented.
Bloomberg News contributed to this report.
