Speech by SEC Commissioner:
Effective Capital Markets Regulation Depends on Access to Real-Time Data
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
May 26, 2010
Let me read you something. "Given the dramatic changes in the complexity and structure of the securities markets during the past five years, including the rapid development of new products such as exchange traded put and call options, the need to accelerate progress toward realization of the National Market System, and the need to improve oversight of the self-regulatory organizations in an environment of increasing trading complexity, the Commission seeks to establish and proposes to implement a national market surveillance system based upon the latest computer technology."1 I am quoting from a report published by the Commission in 1980 to describe and justify its plan for a comprehensive market oversight surveillance system. Unfortunately, soon thereafter, due to deregulatory initiatives2 that were accompanied by significant budgetary constraints,3 the SEC failed to implement a comprehensive market surveillance function.
Flash forward three decades — today, we have seen enormous growth in the capital market, and the SEC has even less access to comprehensive market data. The SEC now operates in a world where it depends on other entities for basic data and lacks the resources for large-scale market reconstructions. For example, to obtain the basic transaction information to investigate the market break of May 6, our staff had to request the data from the exchanges, FINRA, broker-dealers, and other market participants. As we learned during the first meeting of the CFTC-SEC Joint Advisory Committee two days ago, we still do not have all of the data we need. Most Americans assume that the SEC already has these tools and is constantly monitoring the market. It is shocking that the SEC does not have its own direct access to market data.
It is clear to me that, to be an effective capital markets regulator, one must have comprehensive, real-time data about the capital market. The SEC must have this data — and the tools to analyze it — in order to spot egregious conduct, identify trends in the markets, understand the market comprehensively, and re-construct market movements.
Under the new requirements we propose today, there would be a single, central, easily accessible repository for information on quotes, orders, and trades. Every order would be assigned a unique identifier, and each market participant that touches the order would capture and immediately send critical information to a central repository. Each step in the life cycle of an order — from inception through modification, routing, and execution — would be documented and preserved in a uniform manner. Even the beneficial ownership of the customer behind the order would be captured. As a result, the consolidated audit trail envisioned would provide access to data that is urgently needed to conduct effective surveillance across markets and to detect, analyze, and sanction sophisticated trading violations.
As we move forward, I would like to highlight three points. First, today's proposal is just a first step. There must be a long-term commitment made today, as contemplated by the proposal, in order to put a comprehensive system in place. Today's proposal, once implemented, will only cover securities listed on an exchange. However, it is imperative for comprehensive market oversight that the system also include financial derivatives on commodity exchanges and products traded over the counter. The regulated and unregulated markets and entities transact seamlessly within our capital market. In order to have effective regulatory oversight, that oversight must be comprehensive — truly encompassing the whole market.
Second, as the consolidate audit trail system is built, it must be done with the intent that the Commission has unfettered, unlimited access to real-time market data. Our staff should be able to surveil the market and gather data without having to request information from third parties. After all, it is the SEC that is charged with protecting investors, maintaining a fair and orderly market, and facilitating capital formation. To fulfill our mission, the agency must have access to real-time market data and the tools to analyze it. As it should, the public looks to the SEC for answers about our capital markets, and we simply must have access to the data needed to provide those answers. This goes to the core of the agency's function.
And third, we must have the tools in place to be able to analyze and effectively utilize the data. The SEC will need new computing resources and additional staff experts to draw meaning from the raw data gathered in the central repository. For example, it is anticipated that the consolidated audit trail may generate on the order of 100 gigabytes of data per day, and the SEC will need additional computing resources just to store the data. Then, of course, we will need to analyze the data, which requires specialized skills. The staff must be able to use this market data in routine monitoring, analysis of the markets, and market reconstructions.
To be effective, however, the staff must be equipped with the necessary resources to do their job. To that end, the single most transformational act that Congress could undertake is to allow the SEC to be self-funded. The ability to set multi-year budgets and maintain appropriate staffing that arises from self-funding will be crucial to our ability to accomplish our mission. The financial reform bill approved by the Senate authorizes the SEC to be self-funded. As members of the House and Senate work in conference on financial reform legislation, I hope they choose to fundamentally strengthen the SEC and its oversight of the markets by allowing it to be self-funded.
In conclusion, and importantly, I want to recognize the staff that brought and strongly advocated this idea to the Commission. Throughout my tenure, I have listened to your stories about outdated systems and lack of market data access. I have heard about the elaborate work-around techniques you created to reach market data in order to surveil the market. I commend your dedication in working to improve the SEC's inadequate to non-existent access to market data and the adverse impact it has had on your ability to surveil the capital market. I applaud your perseverance in bringing this proposal to fruition. I know we have a long road ahead before we have a comprehensive consolidated audit trail system in place that provides the SEC with real time market data that we can actually use. I will support you in your work for the American public every step of the way.