Is the LTRS a Big Brother?

"We'd have to capture that information in a different way," Lawrence explains. "It would cause a paradigm shift, particularly in those trades that are committed away from us [by an executing broker that then relies on Pershing for clearing and settlement] - there is certain information that is not transmitted or sent currently."

He adds, "The other issue is trade compression. Even to the extent you are looking to get a lot of information out of this, you are not going to get as much as you think."

Often, Lawrence notes, the trading firms with which Pershing and other large trading-services firms correspond do not provide the details of a trade at the granular level that the firm would be responsible for filing with the SEC. Multiple transactions involving a 10,000-share block of IBM, for example, may be reported as one trade at an average price, he says.

And while broker-dealers would bear most of the burden of reporting to the LTRS, large investment management firms would face their own burdens. Large traders would include a firm such as Boston-based Wellington Management, which, via blue sheets submissions, would have to identify to the SEC unique broker-dealer IDs for more than 1,600 clients and 400,000 subaccounts - information Wellington currently does not have, noted VP and counsel Steven Hoffman in a comment letter to the SEC.

Similar to SIFMA's proposal to use OATS, Wellington proposes that the SEC use existing codes and the Omgeo order-allocation and settlement system, which relies on a shared-key system, to limit the amount of proprietary data firms need to keep about each other. The Omgeo ALERT code is a shared code between broker and investment manager that removes the need for investment advisers to store and maintain broker-dealer account numbers. Brokers and institutional trading firms alike could simply grant the SEC access to existing Omgeo ALERT codes for access to individual trading accounts rather than report them all individually and redundantly, Hoffman argued.

In addition to concerns that real-time reporting presents a cost and logistical burden, market participants also question how effective the SEC could be at analyzing such a huge volume of data.

"The cost of real time is much higher than batch trading submission," says the brokerage trading and operations executive who requested anonymity. "It requires us to get all of our data into one place at once. Most of us don't do that right now.

"Our firm has literally hundreds of trading systems. To get the records all in one place in real time and out to the SEC - that is a huge burden," he explains. But perhaps more important, the executive doubts whether the SEC is equipped to process the data it would receive in real time, observing that the regulator is "still trying to figure out what happened on May 6."

The Third 'P' - Privacy

Going beyond the pocketbook and practicality, another major concern is privacy. Some market participants question the potential for information leakage that might be associated with a large storehouse of very detailed information, either by mistake or by the temptation presented to the newly expanded analytics staff.

"The thought everyone is thinking but none will say is: If the SEC could see a problem as it happens, by definition they will have seen a market event that is tradable," relates the brokerage executive. "If the SEC could do that, then who else could do it? If anyone could do that now, they would be trading on it. And if there were people who could do that, would they be working at the SEC?"

Allen Zaydlin, chairman of InfoReach, an execution management system provider in Chicago that has many high-frequency trading clients, agrees that privacy is at risk. "Part of the security that is built into the market as it is structured now is that you don't know where the liquidity is concentrated," Zaydlin says. "There is such a thing as too much information. The more individuals who have certain information, the more likely it is that it will be leaked."

Others reject the notion that the government cannot recruit talent with the right analytical skills and moral acuity to serve the investing public. "The notion that the government will never get the best talent because they can't pay - that is absolutely not true," asserts Matt Samelson, principal of research firm Woodbine Associates in Stamford, Conn. "High pay does not guarantee talent. There are people out there who like the business, and money is not their primary motivator should the SEC choose to hire them."

On the other hand, some industry participants feel the SEC is simply responding to the angry sentiment that has bubbled up from Main Street against Wall Street as the economy has soured in recent years, resulting in political pressure on the SEC to act against opportunistic players. "Some traditional investors are not doing well in this market because they don't have the technology to compete against kids with computers," Zaydlin says. "In their minds, ... that means that if you are successful, you are a villain."

Zaydlin adds that there is little justification for imposing an extra reporting burden on a segment of the trading market that performs a public service by adding liquidity on the off-chance that one of them might do something wrong. "A great injustice will be served" by targeting so-called "large traders," Zaydlin insists. "If you take out companies that provide liquidity, you will see higher transaction costs all around. That means less people who are willing to spread risk around."

According to Woodbine's Samelson, it is likely that some firms that deal in large volumes will indeed bear a disproportionate burden of the cost of increased reporting. But, "It will not put anyone out of business," he insists.

"Trading will become more expensive for some people," Samelson concedes. But the idea behind the rule is a fair principle, he points out, noting that it is simply a matter of applying that principle to the markets cost-effectively and practically.

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