The Washington-based SEC is watching Wall Street

The Washington-based SEC is watching Wall Street with improved clarity

Less than a year after announcing that it intended to create a new market surveillance system – and six months after going live with it – the US Securities and Exchange Commission says that its cloud-based approach is paying dividends and allowing it to examine the structures of the markets it supervises at a greater level of granularity than ever before.

Midas – the Market Information Data Analytics System – is based on High Frequency Trading software from Tradeworx and allows the US regulator to perform what Gregg Berman, associate director of the SEC’s Office of Analytics and Research, calls “full depth of book analysis”.

“We have learnt how important it is to analyse all order book information,” Berman told a session at the Sifma Tech Expo event in New York. This means collecting information from a billion data point, he added, but the fact that the system is cloud based means that the analysis of the data is not as onerous as might be thought. “Because it’s in the cloud, access to processing power is just not an issue for us right now.”

The Tradeworx HFT system quickly brought the SEC up to some sort of parity with the powerful systems used by Wall Street Investment firms, but it will always be analysing the market to understand its structures rather than continually monitoring it, Berman said.

This has led to some criticism of its technical capabilities, which he says are unfounded in the wake of Midas. The idea that market surveillance – as opposed to monitoring of individual firms could ever move to real-time, or even intraday is based on a misunderstanding of complexity of the problem. Looking across the market at those billion data points lets the SEC investigate the interplays of activities that lead to things like the Flash Crash of May 2010 – and to say that HFT was not the underlying issue.

Berman’s presentation would not have pleased anyone in the audience opposed to HFT. “What’s illegal is illegal at any speed,” he said. While there are many questions about the role of HFT in the market, it is the SEC’s responsibility to better understand what is happening in order to inform the debate, which is what Midas will be assisting with. “If we don’t diagnose the problem properly we won’t get the right prognosis,” he said, adding that many problems in the industry are caused by “sloppiness combined with a lack of checks and balances”.

Processing the data is “a huge task, but the trickier part is figuring out what is an outlier or an abnormality”, he said. With a billion data points, an outlier threshold of 0.1% gives 1 million potential outliers, he pointed out, adding “most outlier events are just that – events”.