The Securities and Exchange Commission, long under pressure to catch up with the technological revolution that’s swept through Wall Street, plans to rely more heavily on data as it struggles to shape policy in an increasingly complex market.
In a speech Wednesday, SEC Chairman Mary Jo White said facts — not anecdotes — must drive the ongoing debate about whether to revamp the structure of the market, a venue dominated by high-speed traders and plagued in recent years by a series of disruptive technology glitches that have shaken confidence in the market’s integrity.
The agency’s quest for data-driven policy decisions should be made easier by a technology adopted in January that enables the SEC to stream up-to-the-minute trading activity directly from the nation’s exchanges into its Washington headquarters, White said. By analyzing those massive feeds, the SEC already has gleaned unexpected insights about the market’s plumbing and debunked some assertions about trading behavior.
“Much of the current discussion around market structure seems rooted more in anecdote — and, at times, self interest — than in evidence,” White said at a Security Traders Association conference. “If we want to make good decisions about markets, empirical evidence provides, at the very least, a starting point for a principled dialogue.”
The SEC is charged with maintaining fair and orderly markets. But for decades, the regulator has lagged far behind the regulated in terms of its technological savvy.
The gap became painfully clear after the flash crash of May 6, 2010, when the stock market plunged nearly 1,000 points in minutes and then whipsawed back up. It took the SEC about four months to unwind the billions of orders that took place that day and issue a report on what happened.
Other high-profile bugs and glitches followed, including the botched offering of Facebook’s stock last year and the runaway trades linked to faulty computers at Knight Capital. More recently, a software malfunction led Nasdaq to halt trading of its stocks the afternoon of Aug. 22 for more than three hours.
Meanwhile, the SEC continues to weigh what it should do, if anything, about the high-frequency traders who use sophisticated algorithms to execute transactions at blink-of-an-eye speeds. Critics have been quick to blame these traders for market disruptions and regularly accuse them of gaming the system.
On Wednesday, White said that the risk of technology failures increases as systems become faster and more complex. But she also said that high-speed traders and trading that takes place off the exchanges were not to blame for the problems of the past year and a half.
“These events involved relatively basic, albeit serious, errors,” White said. “Many could have happened in a less-complex market structure.”
White also took the opportunity to dismiss one assertion about high-speed trading techniques. Critics have said that high-speed traders try to bait institutional investors by placing millions of offers to see where they get a bite, then quickly canceling them before anyone has a chance to react.
Using its new technology, the SEC found that while quotes were canceled quickly, people were able to react on those quotes just as quickly.
The technology, created by a New Jersey firm called Tradeworx, also be used to generate much of the content for an SEC Web site that could go live as early as next week. White said the site will enable the SEC to share its research and provide the public with access to tens of billions of trading records previously available to only the most sophisticated of traders.