(Updates with Finra costs and comment letters starting in eighth paragraph.)
Feb. 9 (Bloomberg) -- U.S. Securities and Exchange Commission Chairman Mary Schapiro is backing away from a proposal to require live reporting of trading data as part of the agency’s planned market-surveillance system.
“The chairman believes, based on the comments received, that very substantial benefits of a consolidated audit trail can be achieved at this point without incurring the costs and risks of real-time reporting,” John Nester, an SEC spokesman, said today in a statement.
Schapiro hasn’t scheduled a vote on the audit trail, which the SEC says would help track the cause of disruptions such as the May 6, 2010, market plunge that erased $862 billion from equities in less than 20 minutes before prices rebounded.
Later that month, the SEC proposed building the audit trail -- a multibillion-dollar centralized data hub that would capture “customer and order event information” as it happens. The real-time reporting idea was faulted by the Financial Industry Regulatory Authority, as well as brokerages and exchanges that expressed concern over the plan’s cost, which the SEC initially estimated at $4 billion to build and $2.1 billion a year to maintain.
The SEC currently keeps tabs on the markets using data terminals from outside firms. It took three months to gather trading data for the May 2010 plunge because the information didn’t exist in a uniform or accessible format from exchanges and securities firms. The new system would initially include data on stocks and later options, corporate and municipal bonds, and credit-default swaps, according to the SEC.
“Reviewing real-time data doesn’t reflect how the markets work, such as the various processes that are tied to the end of the day,” said Heather Traeger, a former SEC lawyer who is now at O’Melveny & Myers LLP. “Plus, real-time data is unnecessary to achieve the commission’s stated goals in implementing a consolidated audit trail,” Traeger said in an interview.
U.S. Senate Republicans including Richard Shelby of Alabama and Mike Crapo of Idaho sent Schapiro a letter last month asking why she was pursuing a real-time audit trail instead of Finra’s cheaper alternative. The seven lawmakers asked her in a Jan. 30 letter whether the agency had studied the benefits of “receiving less-accurate and less-complete data on a real-time basis compared to receiving more-accurate and more-complete data on a slightly delayed basis.”
$125 Million Program
Finra’s proposal would cost no more than $125 million to build and a maximum of $40 million annually for equities data, the regulatory organization told the SEC in a letter in April. Finra, based in Washington, oversees almost 4,500 brokers and conducts surveillance for exchanges that account for four-fifths of U.S. equity trading.
NYSE Euronext, Scottrade Inc., Wells Fargo & Co. and the Securities Industry and Financial Markets Association told the SEC in comment letters about the audit trail that collecting real-time information will be too costly and data available at the end of the day or the next should be sufficient. Once the SEC finalizes what it wants, Finra and the exchanges would have 90 days to propose an implementation plan.
“There are decisions the SEC can take to make the cost much less burdensome without really sacrificing the effectiveness and usefulness of the audit trail,” said Howard Kramer, a former SEC associate director who works for Wilkie, Farr & Gallagher LLP in Washington. “Most market participants agree it’s needed. I think they’re willing to bear some expense, but it shouldn’t be needlessly costly.”
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