The US$6 billion-plus data cloud

A patent awarded to risk management and surveillance technology provider FTEN could stave off a US$6 billion-plus regulatory burden on the US securities industry, the firm claims.
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A patent awarded to risk management and surveillance technology provider FTEN could stave off a US$6 billion-plus regulatory burden on the US securities industry, the firm claims.

Earlier this week, New York-based FTEN received a long-awaited patent from the United States Patent and Trademark Office for a technology that provides “real-time cross-market risk management and surveillance for electronically traded securities via aggregation, normalisation and analysis of real-time drop copies”. In short, FTEN's Financial Data Processing System (for which a patent application was initially filed in 2003) uses data automatically generated by securities transactions – such as the drop copies created by exchanges to record individual trades – to allow live monitoring of trading activity no matter how high its frequency.

At present, FTEN's secure data cloud facilitates surveillance and risk management of up to 17 billion US equities trades per day executed by the clients including prime brokers, broker-dealers, hedge funds and proprietary traders. But according to CEO Ted Myerson, the technology can play an industry-wide role. “It is our hope that regulators will also consider similar secure data cloud approaches to achieve broader systemic risk management objectives of increased transparency, accountability and control,” he says.

Myerson notes that the likely increase in regulatory surveillance of the US equities market resulting both from the Dodd-Frank financial reform bill and a series of initiatives by the Securities and Exchange Commission (SEC) designed to intensify monitoring of the high-frequency trading could land the industry with a steep – and unnecessary – bill to foot.

The SEC is presently planning three rule changes to enhance surveillance of US equity trading activity. On 26 May, the US securities regulator proposed a consolidated audit trail system to enable tracking of “information related to trading orders received and executed across the securities markets”. Six weeks previously, the SEC had already called for a large trader reporting system that would enhance its ability to identify high-volume market participants and analyse their trading activity. The SEC is also expected soon to release details about risk management requirements of the market access rule (15c3-5) unveiled in January, which provides a new framework for sponsored access to trading venues by US market participants.

In addition, the Dodd-Frank financial reform bill has created a new regulatory body, the Office of Financial Research (OFR), which will be a department within the US Department of the Treasury charged with supporting the Financial Stability Oversight Council by collecting data, standardising data forms and developing risk measurement and monitoring tools. “We will hear a lot more about the OFR because the Dodd-Frank bill has empowered it to obtain significant levels of detail on financial transactions,” says Gary LaFever, chief corporate development officer, FTEN.

With the consolidated audit trail slated to cost US$4 billion in its first year, the market access rule reckoned to command set-up costs of US$2 billion and estimates for the creation of the large trader reporting system reaching a maximum of US$750 million, the cost of monitoring the US securities market is projected to rise steeply at a time when commissions are going in the other direction.

“We believe there are other ways to achieve the SEC’s objectives – and we think ours is the least intrusive,” asserts LaFever. FTEN suggests that a data cloud approach to industry-wide surveillance and risk management would also yield results quicker than the paths currently envisaged by the regulator.

A phased approach, starting with venue-generated data, could be established within a matter of months, with data sourced direct from broker-dealers, proprietary traders and other market participants added subsequently. “Just use of drop copies from exchanges would provide 100% coverage of high-frequency trading instantaneously,” argues LaFever, who suggests that once the data cloud is complete it could be a revenue source in its own right. “In the longer term, the additional uses that the data could be put to, for example transaction cost analysis, could even underwrite the cost of greater levels of regulatory surveillance rather than the likely imposition of a surcharge on the sell-side,” he says.

FTEN has written to Elizabeth Murphy, Secretary of the SEC, explaining the potential advantages of an iterative approach to achieving a consolidated audit trail that leverages existing systems and data flows in the US equities market. But Myerson says this approach has applications beyond the US. With European regulatory bodies such as the Committee of European Securities Regulators examining the impact of high-frequency trading on the European equity market infrastructure, he suggests that secure data cloud solutions can help meet regulatory goals around the world. “The data cloud approach could also reduce the effect of regulatory fragmentation globally and reduce the scope for duplication of effort among regulators,” says Myerson.