Some Questions for the SEC on the New MIDAS Surveillance Plans
Last Tuesday, SEC Chairman Elisse Walter gave a speech at the American University School of Law in Washington, D.C. The theme of the speech was to let investors know that the SEC is looking out for the well-being of the average investor. While we recommend reading the entire speech, the section on "Better Data Analysis" is what caught our eye.
Chairman Walter let the students in the audience know that the SEC was going to be getting tough on market abusers. And the way they are going to do this is to fight fire with fire. Chairman Walter introduced MIDAS and explained what it is supposed to do:
"MIDAS stands for Market Information Data Analytics System. It captures all orders posted on the national exchanges, all modification and cancellation of those orders, all trade execution of those orders, and all off-exchange executions.
For the growing team of quant types now employed at the SEC, MIDAS is becoming the world's greatest data sandbox. And the staff is planning to use it to make the SEC a leader in its use of market data.
MIDAS has immediate applications. It can help us monitor and understand mini-flash crashes, or pick up on possibly troublesome or illegal behavior, for example, by noting excessive cancellations of message traffic. But what's critical in the context of long-term investor protection is that it will give us dramatically better insight into the function of a market that moves many millions of dollars in millionths of a second. It will be like the first time scientists used high-speed photography and strobe lighting to see how a hummingbird's wings actually move.
This information has the capacity to give regulators -- as well as academics and other stakeholders -- unprecedented insight into the way markets work today. And, it will make us better able to address concerns about market structure, monitor trends over time, and provide information about the effects of any changes in rules, policies or market practices."
While at first glance, MIDAS sounds great, there are a lot of questions that we have about it. We wish we could have heard the question and answer session after the speech because we would have hoped some questions like these were asked:
--It's been over 5 years since the SEC implemented Reg NMS which had the effect of deeply fragmenting the market and caused an explosion in volume and quote traffic. Why has it taken the SEC this long to develop a system to monitor the equity market?
--Why didn't Arthur Levitt envision a system like MIDAS when he started his crusade to fragment the markets?
--Why did the SEC have to hire Tradeworx, an HFT firm, for $2.5 million per year to build MIDAS? Why couldn't you have built it yourself?
--Since you are just now rolling MIDAS out, does this mean that the SEC lacked the proper oversight for the past 5 years?
Chairman Walter went on to explain what MIDAS might be used for:
Among other things, the staff will likely explore such subjects as:
--The speed of quotes and subsequent cancellations.
In today's market, where fractions of a second can be critical, this could give us a clearer picture of the potential effects of rules like those requiring quotes to have a minimum time-in-force.
--The full depth of book for liquid as well as illiquid stocks
This could help us understand how overall market depth is affected, as top-of-book spreads narrow or widen, and the potential effects of a tick size pilot and other rule changes.
Analysis of volatility within a trading day could allow us to better understand anomalous trading and extraordinary intraday spikes as well as monitor the impact of rules that limit stock volatility once fully implemented.
In short, MIDAS will enable us to examine the fundamental mechanics of today's high-speed markets in a way that has never been done at the agency."
Back to some more questions for the Chairman:
-- Will MIDAS give you any information on IOI's placed on dark pools?
-- Will MIDAS give you information on the types of orders that are being used (i.e. post only ISO's)?
-- It seems like MIDAS is just a collection of publicly available data feed streams. Why did it cost so much to build?
-- Did any other vendors besides Tradeworx submit a proposal for the MIDAS project?
-- It seems that a more independent firm would have been a better choice to handle the MIDAS contract. Was Nanex asked to participate in this project?
Let's listen in again to Chairman Walter:
"MIDAS is just the beginning...Where MIDAS collects vast quantities of public data, CAT will capture non-public data as well -- not just trades and when they were executed, but also, for example, the identities of the parties to the trades.
I can't overestimate the importance of CAT -- comprehensive public and non-public data about the market, coming from a single system, could be the most important regulatory development in my lifetime. But, we need to do it right. As I have said before, it is my personal hope and expectation that the plan submitted for the agency's consideration will ultimately produce a consolidated audit trail that is more timely, accurate, complete and accessible and one that will provide for the eventual expansion to additional instruments, such as OTC equities, fixed income, and futures. I believe this is an extraordinary initiative and -- if properly constructed -- the consolidated audit trail will be the backbone for our future surveillance and policy making efforts. And it will set the stage for expansion to additional instruments and markets as well. My long-term vision is a consolidated audit trail that spans products, markets and the globe."
And finally lets wrap up with some more questions that the audience could have asked:
-- Did you say that MIDAS only captures public data? Does that mean MIDAS will not provide the SEC with ability to track an order or trade to its originator? (in case you are wondering, MIDAS will not do this)
-- We have heard that the stock exchanges have a big influence in how the Consolidated Audit Trail will be built. Aren't these the same exchanges that have compromised the integrity of the stock market by giving in to all the demands of the HFT community? Should we have faith that the exchanges will represent the needs of all investors and not just the ones that are paying them the most money?
-- When do you expect the CAT to be operational?
-- Will the CAT initially only include information on stocks and options?
There are lots more questions that could have been asked on the subject of MIDAS and CAT but we'd like to keep this note under 50,000 words.
The conclusion here is that while having MIDAS is better than nothing, it still will not identify many potential nefarious practices since it doesn't trace information back to the user level and it relies on only publicly available information. While CAT will be much better than MIDAS, it unfortunately is currently in the industry sausage factory and will be there for quite some time.
While we really wanted to be encouraged by Chairman Walter's speech (we do think she is trying to do the right thing), unfortunately we still think that the SEC is over matched against the HFT community.Sal Arnuk is partner, co-founder and co-head of equity trading of Themis Trading LLC. Mr. Arnuk has extensive experience in equities trading and is an expert in electronic trading and market structure. He is also the co-author of Broken Markets -- How High Frequency Trading ... View Full Bio