Opening Statement at SEC Open Meeting: Consolidated
Audit Trail
by
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
Washington, D.C. July 11, 2012
Good morning. This is an open meeting of the Securities and Exchange
Commission on July 11, 2012.
Today, we will consider a recommendation to significantly enhance our
ability to regulate the nation´s equity markets.
From virtually the day I arrived at the SEC three-and-a-half years ago,
I have talked about the importance of a consolidated audit trail and I am
enormously pleased that we are moving ahead to make it a reality.
In particular, we will consider whether to adopt a rule, Rule 613,
which would require the nation´s securities exchanges and FINRA to develop
a detailed, comprehensive plan for creating, implementing, and operating a
single, market-wide consolidated audit trail system.
This system will collect and accurately identify – among other things –
every order, cancellation, and trade execution for all exchange-listed
equities and options across all U.S. markets.
In today´s competitive marketplace, trading is dispersed across a
variety of market centers ranging from public venues, to private dark
pools, to individual broker-dealers.
And the vast majority of trading is now performed by automated computer
algorithms used by many different kinds of market participants.
This includes electronic market makers and high-frequency traders
seeking to capture small profits from thousands of individual trades. It
includes large institutions seeking to accumulate large amounts of
securities without affecting the market. And it includes broker-dealers
seeking to provide individual retail investors with the best execution for
their order.
As a result of this automation, market activity is now measured in
milliseconds and microseconds – increments so small that only the speed of
light becomes a limiting factor. In addition, automation means it is not
uncommon for hundreds – and sometimes thousands – of orders to be
generated, modified, cancelled, aggregated, disaggregated, and routed
across a dozen venues, all before even a single trade is executed.
In carrying out their responsibilities, regulators must be able to
corral this vast amount of disparate data in a way that allows us to
monitor, correlate, and analyze a vast stream of market events and
transactions. The availability and quality of trading data are central to
the SEC´s ability to protect investors, and to maintain fair, orderly, and
efficient markets.
Though FINRA and some of the exchanges currently maintain their own
separate audit trail systems, there are numerous shortcomings regarding
their accuracy, completeness, accessibility, and timeliness. These
limitations make it impractical for regulators to readily follow orders as
they are routed, aggregated, re-routed, and disaggregated across multiple
markets.
For instance, after the Flash Crash of May 6, 2010, it took dozens of
highly-trained economists, financial professionals, and data technologists
four months to aggregate and process the information required to fully
analyze just a few hours of trading on a single day. While that process
was remarkable considering our limitations, and while we were able to
identify the various causes of that event, efficient and effective market
regulation requires that future analyses not take nearly that long.
In fact, it is even more difficult to perform some other types of
market analyses because certain key information is never collected by
audit trails – information such as the identity of the customers who
originate orders, or the fact that two sets of orders may have originated
with the same customer.
A consolidated audit trail that accurately tracks orders throughout
their lifecycle and identifies the broker-dealers handling them will
provide us with an unprecedented ability to effectively oversee the
markets we regulate.
First, a consolidated audit trail will increase the data available to
regulators investigating illegal activities such as insider trading, wash
sales, and market manipulation. In particular, increased data will
facilitate risk-based examinations, allow more accurate and faster
surveillance, improve the process for evaluating tips, complaints, and
referrals, and promote innovation in cross-market and principal order
surveillance.
Second, a consolidated audit trail will significantly improve the
ability of regulators to reconstruct broad-based market events in an
accurate and timely manner. The sooner regulators can reconstruct the
event, the sooner we can inform the public and determine what, if any,
responses might be required.
Third, a consolidated audit trail will significantly increase the
ability of regulators to monitor overall market structure, so that both
the Commission and the SROs can be better informed about how our rules are
affecting the markets. For example, having more precise data on the
trading patterns of different types of market participants would help us
better understand the impact of high frequency trading on the quality and
fairness of our markets.
Finally, a consolidated audit trail will reduce the regulatory data
production burdens on SROs and broker-dealers by reducing the number and
types of ad hoc requests that regulators submit today. A consolidated
audit trail that covers the entire market may also eliminate the need for
multiple other, less efficient, reporting requirements that market
participants must current comply with.
The rule the Commission is considering today is the result of careful
information gathering and thoughtful deliberation. Since the rule was
first proposed in 2010, the Commission received many comments and our
staff have met frequently with interested parties about the proposal. This
has helped us identify strengths and address weaknesses.
As a result, there are some aspects of the rule we are considering
today that differ from what the Commission had originally proposed. For
example, the rule will now require broker-dealers to report their activity
by 8 a.m. the next trading day. I believe that all of the most important
regulatory benefits of a consolidated audit trail are just as achievable
with a next-morning deadline as they are with a real-time reporting
requirement.
However, many other aspects of the rule have not changed. For instance,
the rule continues to require customer identifiers that will be assigned
to every order and trade – something I believe is critical to achieving
the regulatory benefits of a consolidated audit trail. This is not only
necessary, but also given the many advanced technologies used by the
market to route, re-route, aggregate, and disaggregate customer orders
across dozens of venues in the space of a few milliseconds, I am confident
that it is achievable as well.
Today´s rule ultimately will lead to better protections for investors,
and fairer, more orderly, and more efficient markets. I look forward to
the Commission receiving a plan that meets the extensive requirements we
set forth in this rule, and, that is capable of evolving over time to
match the needs of regulators of dynamic markets.
Today´s action adds to a growing list of significant measures we have
put in place to make our financial markets safer and more efficient. In
the past two years alone, we have put rules in place for revised
market-wide circuit breakers and a new limit-up/limit-down mechanism to
pause trading when markets move too far, too fast. We have clarified up
front when erroneous trades are to be broken. We have effectively
prohibited stub quotes and barred naked access to the market.
And, we have adopted a large trader reporting system that will allow us
to better identify large market participants to collect information and
analyze their trading activity. More recently, we´ve procured new
technological capabilities and systems designed to collect and analyze the
mounds of trade and order data that many public exchanges currently
disseminate.
In sum, the rule we are considering today represents a great leap
forward in providing the SROs and the Commission with the data and means
to exponentially enhance our abilities to oversee a highly complex market
structure.
Before turning the discussion over to Robert Cook, the Director of the
Division of Trading and Markets, to more fully describe the details of the
rule, I would like to acknowledge the exceptional efforts of David
Shillman, Gregg Berman, David Hsu, Jennifer Colihan, Leigh Duffy, Rebekah
Liu, Carl Tugberk, and Nathaniel Stankard in the Division of Trading and
Markets … Steve Cohen, Bruce Karpati, Hugh Beck, and many other
contributors in the Division of Enforcement … John Polise, Mark Donohue,
Connie Kiggins and the many contributors in the Office of Compliance
Inspections and Examinations … Amy Edwards, Adam Glass, Vanessa
Countryman, and Chuck Dale in the Division of Risk, Strategy, and
Financial Innovation … And Meridith Mitchell, Debby Flynn, Cynthia
Ginsberg, and Robert Teply in the Office of the General Counsel. I would
also like to thank the other Commissioners and their counsel for their
work and comments on the proposed rule.
Now I´ll turn the meeting over to Robert to hear more about the
Division´s recommendations. |