by Constantine von Hoffman

SEC ‘Money Saving’ Trade-Tracking System Has Very Costly Flaw

Mar 28, 20133 mins
GovernmentGovernment ITRisk Management

The US SEC is content with a trade-tracking system that provides data on stock trades the day after they happen, something no broker would put up with. blogger Constantine von Hoffman says a real-time version will soon be available, but it won't be used by the SEC. Here's why.

When it comes to finances there’s a big difference between real-time data and day-old data. Unfortunately no one seems to have told this to the U.S. Securities and Exchange Commission (SEC).

Last year SEC commissioners voted 3-2 to go ahead with a plan for a new computer system that would track all stock trading in the United States. The markets are now dominated by rapid-fire computerized trading so such a system is an absolute necessity, at least if you want to prevent things like 2010’s “flash crash.”

When the new system is up and running–that won’t take too long, right?–it will track orders, cancellations and executions of all U.S.-listed stocks and options on all markets. It will then deliver data to the SEC in a nice tidy standardized package by the next trading day. In other words: 1) See horse in barn; 2) see horse leave barn; and 3) go close gate.

To be clear, the system will likely be an improvement over the way things are currently done. Today, the SEC requests stock-trade information from various markets and then–sometimes a week later–the data is delivered in non-standard formats. Using that system, it took the SEC more than five months to reconstruct and analyze just a few hours of trading activity on May 6, 2010, when the Dow Jones briefly dropped nearly 1,000 points.

For those of you wondering if the agency used a telegraph to get this data, the answer is no. The last telegraph shut down a couple of years ago. I wouldn’t rule out the Pony Express, though.

The new system was approved on a 3-2 vote.The opposing two members wanted the original plan, which would have called for the SEC to get information in real time.

According to a spokesman for the SEC, then Chair Mary Schapiro cast the deciding vote for the next-day system because, “The chairman believes, based on the comments received, that very substantial benefits of a consolidated audit trail can be achieved at this point without incurring the costs and risks of real-time reporting.”

The costs and risks of real-time reporting? You’d be hardput to find a single brokerage anywhere that would be content to act on day-old market info. The new system is expected to cost $125 million to build, and “equities data” will cost another $40 million annually. (Shouldn’t the markets provide that for free?). In comparison, the 2010 crash erased $862 billion from equities in less than 20 minutes before prices rebounded.

It’s not like a real-time system isn’t possible. I know of at least one company that’s working on one right now. They will sell it–easily–to the private sector which, once again, will leave regulators in the dust.