The regulators who police Wall Street are ramping up their surveillance of trading activity, using technology to suss out potentially abusive practices that threaten to undermine public confidence in an increasingly fragmented financial market.
The Financial Industry Regulatory Authority (FINRA) has launched 280 investigations based on information it gleaned from software it rolled out last August that scans the major trading exchanges and other venues to look for specific patterns of suspicious trading.
The self-regulatory agency, which oversees broker-dealers, also is attempting to take a deeper look into the trading that takes place off the public exchanges on alternative trading venues, including “dark pools.” In dark pools, the identity of the buyer and seller of a stock are masked from the public.
The group’s board agreed this week to submit a proposal to the Securities and Exchange Commission that would require these alternative venues to submit weekly stock-by-stock trading data to FINRA. That could make it easier for the agency to spot trading anomalies.
As of May, about 14.7 percent of total U.S. stock-trading volume took place in dark pools, according to Rosenblatt Securities. But the operators are currently not required to provide detailed information to regulators. Having that data would augment efforts to close the technological gap between regulators and the regulated.
The new software has also been key to closing that gap. FINRA has been using its new computer programs to track activity on the New York Stock Exchange and Nasdaq. By year’s end, it will start doing the same for Direct Edge, another exchange operator.
FINRA developed a series of computer programs to detect specific “threat scenarios.”
“We’re looking for traders that are consciously dispersing their activity to avoid detection,” said Thomas Gira, executive vice president of market regulation at FINRA.
Regulators have been struggling to keep pace with technological advances in a fragmented financial market that is now made up of 13 exchanges, dozens of trading venues and trades that take place at blink-of-an-eye speeds.
The regulators’ shortcomings became painfully obvious after the “flash crash” on May 6, 2010, when the stock market plunged nearly 1,000 points in minutes and then whipsawed back up. It took the SEC, Wall Street’s chief regulator, four months to determine what happened.
The incident prompted the SEC to hire Tradeworx, a New Jersey firm that provided the agency with technology that gathers real-time market feeds from the public exchanges. The technology, called Midas, was formally launched at the start of 2013.
While it has remained mum about whether the technology has led to enforcement actions, the SEC has said it has helped debunk some myths about the markets.
For example, after using the technology to examine mini-crashes — an extreme movement in a single stock — the SEC learned that these events were not the product of a broken market, as critics have often claimed, Gregg Berman, associate director of the SEC’s analytics and research office, said at a recent conference.
“What we generally have found is that sudden spikes are not typically caused by any of the reasons I just mentioned,” Berman said. “Rather, they tend to be triggered by old-fashioned human mistakes.”