The chairman of the
The database would provide “fully sequenced” information on the execution, clearing and settlement of trades in all types of securities on all venues extant, said Rick Ketchum, chairman and CEO of FINRA, tthe largest independent securities regulator in the United States.
“If you don’t, things will fall through” the cracks, he said in comments delivered at the annual meeting of the
The problem that the single database and the single “surveilling” body would respond to is increasing “fragmentation we see in the markets and the increasing number of genuine liquidity centers, and what these do to the ability of regulators to oversee the markets,’’ said Ketchum.
A decade ago, a single market – the New York Stock Exchange – dominated trading and that made surveillance relatively easy. But, in 2009, the majority of trading is occurring on a proliferating number of electronic networks and dark pools of capital. The exchanges have been empowered to police trading and activities, but that is getting more difficult, Ketchum said, as market activity disperses.
“The decline of the primary market concept, where there was a single price discovery market whose on-site regulator saw 90-plus percent of the trading activity, has obviously become a reality,” he said. “In its place are now two or three or maybe four regulators, all looking at an incomplete picture of the market and knowing full well that this fractured approach does not work. This is especially true given how easy it is for market participants to move volume on a second-by-second basis between venues.’’
This had tended to “cloud the audit trail” and make order information “inconsistent and incomplete.”
For instance, FINRA serves as the trade repository and regulator of dark pool activity, “it's not always clear what activity emanates from the pool versus what emanates from unrelated desks throughout the sponsoring firm,’’ he said. “And data quality varies across the exchanges, with no clear set of reporting requirements. It is also becoming easier to hide the identity of the actual participant in a trade in the trade report, further frustrating our efforts. It often takes days, not minutes, to understand who traded and where, and that is not the standard we want for a well-regulated and modern market.”
Ketchum said FINRA “would do a good job” at creating and surveilling a single data base. But there are alternatives, he told Securities Industry News.
One would be to expand the database of the Intermarket Surveillance Group, whose membership consists of 23 self-regulatory organizations in five countries. The other would be to move more markets under a “single umbrella” to begin to build that database.
The cost would “not be exceptional,’’ he said. And the creation of the database – and the choice of a “single set of eyes” – does not require new legislation.
It’s a decision, he said, that largely “has to be made by individual exchanges.”
The consolidated database will allow that set of eyes to look at activities and patterns in financial markets “holistically.”
“We've taken that first step by consolidating the surveillance for insider trading based on listed market,’’ he said. “But there is much more to be done in the areas of front-running, manipulation, abusive short selling, and just having a better understanding of who is moving the markets and why.”
A single regulator can “bring the best technology, the best people, and a unified set of rules” to bear on markets.
He called his proposal “somewhat daunting” but “a significant undertaking and a baby step” at the same time.
Ketchum is a former regulator of multiple markets at NYSE Regulation and a current regulator of multiple markets at FINRA.
“Right now, we are looking through a translucent veil, and only seeing the registered firms, and that gives us an incomplete—if not inaccurate—picture of the markets,” Ketchum said.
As markets and instruments proliferate, he said, “there is a lot of work ahead, but not a lot of time."
This story has been reprinted with permission from
