SEC poised to vote on stock surveillance system this week

Plan’s Roots

The roots of the plan go back to 1980 when Congress authorized $12 million for the SEC to build a computer system to oversee markets because legislators were concerned exchanges were failing to do an adequate job monitoring trading, Kwalwasser said. The pilot program was dropped when exchanges and the predecessor organization to Finra established methods to share information and meet surveillance duties such as monitoring for suspicious activity and pursuing insider trading.

“With the grilling the SEC took in front of Congress after the flash crash, they didn’t want to have to rely on anybody else -- they wanted to get information that was as complete as possible themselves,” Kwalwasser said. The SEC is pursuing a consolidated audit trail without claiming that the exchanges “haven’t lived up to what they’re supposed to do, even though trading has become harder to track,” he said.

Market Fragmentation

The supervision of equity and options markets has exploded in complexity since the 1980s as regulations led to more venues competing for quotes and trades while exchanges and Finra installed systems to assemble order and transaction data for the products they oversaw such as stocks listed on NYSE or Nasdaq. Abusive trading dispersed across multiple venues became harder to track than activity centralized in one place. The New York Stock Exchange accounted for 22 percent of trading in the companies it lists last month, compared with 87 percent in 1980, according to data compiled by Bloomberg and NYSE.

Once the exchanges and Finra present a national plan to establish an audit trail, it will be subject to SEC approval before being implemented. The agency estimated in its 2010 proposal that the exchange and brokerage industry would need to spend $4 billion to set up the central repository and develop related systems. Annual ongoing costs would be $2.1 billion.

Finra and Nasdaq OMX Group Inc., the operator of Nasdaq Stock Market, each told the SEC last year that they could be the technology processor for the audit trail. Finra gave the SEC a blueprint in April 2011 for the timeline it would adopt 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 expense of integrating options, bonds, swaps and other products, which the SEC wants.

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