Monday, October 08, 2012 11:59:59 AM

SEC taps HFT firm to boost market oversight

US watchdog the Securities and Exchange Commission (SEC) plans to tap the expertise of a high-frequency trading (HFT) firm to bolster its understanding of low-latency markets.

As part of the so-called Midas project, Tradeworx, a New Jersey-based proprietary trading firm, will reportedly sell the watchdog technology that gives it access to real-time bid and offer data from the US’ 13 stock exchanges.

Using the data, the SEC will be able to determine how HFT strategies interact with the market.

According to the reports, Tradeworx will offer the SEC the same data it sells to other clients, as well as analytical tools the firm uses internally to analyse market patterns. The HFT firm will not have visibility on how the SEC is using the system.

Although the SEC already has a number of proposed or available monitoring tools that can be used to keep tabs on the activity of different participants, industry observers suggest partnering with an HFT firm will help it get up to speed a lot faster.

“The SEC, like any regulator, is nowhere near as sophisticated as firms which specialise in particular areas like HFT and this partnership appears to be a recognition of that,” Sean Owens, director of fixed income and derivatives at financial consultancy Woodbine Associates, told “In this agreement, the SEC wants their surveillance to be more timely. Like the large trader identification rule, they want to be faster in the ability to spot potentially harmful market activity.”

The large trader identification (LTID) rule was proposed shortly after the 6 May 2010 flash crash and was designed to bolster the oversight of market activity. The LTID imposes reporting requirements on market participants that trade over a certain amount in US-listed stocks and is used by the SEC to reconstruct and investigate significant market events.

The regulator is also waiting for US exchanges, in their role as self-regulatory organisations, to propose a consolidated audit trail (CAT) that will combine securities trading data across multiple US equity markets into a single database for the first time.

The CAT, which is likely to be implemented in 2014, will help the SEC better detect insider trading and market manipulation across multiple markets.

Anish Puaar +44 (0)20 7397 3817