The SEC Ups its Game with High Frequency Trading Tools

The Securities and Exchange Commission is moving a step closer toward policing the equities and options markets in real time, based on reports that it has licensed a market data and research platform from Tradeworx, a high-frequency trading firm and technology vendor in Redbank, New Jersey.

This suggests the top cop will now obtain the technology and direct-data feeds it needs to investigate rogue algorithms and other wild swings that plague U.S. stocks on a daily basis.

Regulators will tap into real-time feeds of orders, quotes and transactions that are generated by exchange companies such as NYSE Euronext, Nasdaq OMX, and CBOE Holdings, among others, that are mostly used by automated trading firms and bank trading desks, according to Newark StarLedger on Friday.

From a The Newark Star Ledger:

“Historically we have not had the most robust systems to do the analysis one would want to do with data,” Gregg Berman, senior adviser to the director of the SEC’s division of trading and markets, said in a phone interview with Bloomberg News.. “In one fell swoop we have become one of the most advanced institutions in terms of our technical and analytical capabilities.”

The contract is said to cost about $2.5 million in fees the first year, according to the Newark Star Ledger.

Under the program, real-time trade and depth-of-book data will be collected from all 13 U.S. stock exchanges and the Options Reporting Authority, adding futures markets later on, according to the SEC’s specifications. The SEC will also examine depth-of-book data, which refers to quotes and orders at prices inferior to the best levels on each market and includes the number of shares or contracts available at those prices. Public quote and trade data will also be captured, according to the Newark Star Ledger.

Licensing such a system is a significant move for the SEC, which has lagged behind exchanges and automated market makers that can afford to subscribe to the fastest data feeds and co-locate their computerized models in data centers to be closer to exchange matching engines.

“It will allow the SEC to significantly upgrade its ability to monitor and analyze suspicious or anomalous activity, study market structure and behavioral patterns of trading algorithms, monitor markets in real time, etc.,” commented Manojj Narang, CEO of Tradworx in an emai to Advanced Trading. “We think that he possession of such capabilities by the SEC is instrumental in restoring investor trust in the market, and modernizing the agency to be effective on the age of computerized trading,” added Narang in the email.

The data tools are meant to be used by as many as 100 people at the agency, which are expected to generate hundreds of queries into daily trading activity. The SEC Division of Trading and Markets and the Division of Risk, Strategy, and Financial Innovation, will use the system.

The SEC issued its specifications for the market data analysis and collection solution for equity and option data on Nov. 30, 2011. According to a synopsis of the spec, the system is one that combines access to data services, applications, and related databases and provides SEC staff with the same speed, ease, and reliability of data collection and analysis that is available to sophisticated market participants.

Berman told the Star Ledger: “The data captured will be used to focus on the impact of high-frequency trading, the consequences of high rates of order cancellations, connections between activity in exchange-traded products and individual stocks, and the effects of SEC or exchange rules on the marketplace. A team of employees from different SEC divisions will monitor and analyze the markets using the market-data tool, he said.

However, the SEC is not necessarily looking to analyze data at the microsecond level of speeds at which transactions are execute by machines. The SEC told vendors that it wanted to be able to analyze market data at intervals of one thousandth of a second, one second or one minute.

But, the new market data system is different from the larger consolidated audit trail project, approved on July 11, which requires U.S. securities exchanges and the Financial Industry Regulatory Authority to establish a system to reconstruct market crises and expedite surveillance, across the entire market including 13 exchanges, 10 options exchanges and broker dealers executing trades off-exchange. This system was supposed to be real time but due to complaints from broker dealers and exchanges that it cost too much, the real-time aspect was dropped.

In the end, the SEC will still gain a real-time tool with direct feeds, databases and analytics, and that combined with the consolidated audit trail should be a quantum leap above what the regulator currently has in its arsenal to scrutinize market behavior.