SEC Chair White Emphasizes Technology Agenda for 2014

Addressing the 41st Annual Securities Regulation Institute in Colorado, Calif., White highlighted two major technology programs that the SEC had instituted in recent months. Both, she said, are allowing the regulator to cope with rapidly evolving markets.

The first of the two programs is the National Exam Analytics Tool (Neat), developed by the regulator's Quantitative Analytics Team. The system allows staff to analyze enormous amounts of data, such as one example given by White which allowed the regulator to examine, in 36 hours, 17 million transactions.

"Among its many uses, Neat can search for evidence of potential insider trading by comparing a database of significant corporate activity like mergers against the companies in which a registrant is trading and analyze how the registrant traded at the time of those significant events," she said. "Neat can review all the securities the registrant traded and quickly identify the trading patterns of the registrant for suspicious activity."

Pivot
The SEC and its sister agency, the Commodity Futures Trading Commission (CFTC), have come under sustained criticism during recent years for failing to keep up with the proliferation of technology in US financial markets. Data, in particular, has been a bête noire for the CFTC, and a source of embarrassment after it admitted that it couldn't keep up with the volume of data it had mandated firms to report.

On the SEC's part, the agency has shown a willingness to engage more thoroughly with the market on the issue of technological oversight. Its Market Information Data Analytics System (Midas) courted controversy when it was announced, due to its construction by the technology arm of a high-frequency trading (HFT) firm, but White says that it has already begun to produce valuable results.

Among its many uses, Neat can search for evidence of potential insider trading by comparing a database of significant corporate activity like mergers against the companies in which a registrant is trading and analyze how the registrant traded at the time of those significant events. - Mary Jo White, SEC.

"Midas is already revealing some important, data-based realities that may resolve some of the speculations about behavior in today's market structure," she said. "Just earlier this month, for example, the SEC staff published an analysis showing that for the most part the advent of public transparency for 'odd lot' trades does not seem to correspond with a decline in such trades. The staff noted that this result suggests that a lack of transparency may not have been one of the drivers for breaking trades into odd lots, which some observers have suggested is a technique to hide trading activity."

Reg SCI
Looking ahead to the rest of the year, White also picked out the SEC's technology-focused rule, Regulation Systems Compliance and Integrity (Reg SCI), as a likely movement point. Proposed early last year, the rule would require firms to extensively test and oversee systems crucial to their operations, and it has widely been seen as a response to failures in trading and market-data engines, and other technology areas that have crippled various firms and caused market halts at exchanges over recent years.

"In addition, I anticipate that the Commission's 2014 rulemaking agenda will include consideration of the adoption of Regulation SCI," she said. "As some of you know, Regulation SCI would put in place new, stricter requirements for the use of technology by exchanges, large alternative trading systems, clearing agencies, and securities information processors. Regulation SCI can be ─ and should be ─ the market-side counterpart to the intermediary-focused Market Access Rule adopted by the Commission in 2010 to better regulate how broker-dealers manage the technological and other risks associated with direct access to markets."

The full text of White's speech, which also covers derivatives, admissions of guilt and further areas, can be found here.