One of the best ideas to better regulate Wall Street, if by regulating we mean trying to alleviate systemic risk, is coming out of the Securities and Exchange Commission and not Congress. It’s a proposal that would require brokers to assign large traders, those who trade, say, more than 2 million shares of listed stocks or options in a day, an identification number that would enable the creation of a database that can track market moving activity the way oceanologists track the migrating and feeding patterns of great white sharks.
While the past history of the SEC’s modus operandi – reacting to the latest brush fire on the fly – would suggest this idea emanated from the aftermath of the May 6 “flash crash” (which still has not been explained), this large trader rule proposal was actuality put out for comment in April. This isn’t to say the SEC is ahead of the curve here. In fact, creating such a mechanism for monitoring the market was first discussed following the crash of 1987.
In the wake of a Congressional probe (the Brady Commission) into the causes of that October ’87 event, there were hearings that eventually blamed portfolio insurance, which led lawmakers to give the SEC the authority to track large market movers, something the regulator previously lacked the authority to do. Instead, the SEC moved slowly on the plan during the 1990s and ultimately decided not to try to tag traders.
One of the driving forces in the recent revival of the measure was Senator Ted Kaufman, the Delaware Democrat who took over Joe Biden’s seat. Senator Kaufman promptly stated he is not running for reelection, thus becoming a modern day folk hero among populists and liberals. “This market structure oversight measure has been a pet issue of Kaufman’s,” said a Senate staffer who requested anonymity. “He’s been very vocal, and the SEC, to its credit, listened.”
Ron Geffner, who heads the financial services practice at the law firm Sadis Goldberg, said that of all the various financial regulation proposals floating around at the moment, the creation of a large trader reporting database is actually one of the more dramatic, and impacts the most participants, i.e. money managers and hedge funds. And in many ways, Geffner said, it is among the most practical ideas put forth so far.
“In terms of implementing such a system, it would not be all that onerous because the technology is in place,” Geffner. “The SEC can build this database easily enough, but how they use the data, whether they get overwhelmed by too much data; that is still an open question. In theory, though, it’s a good idea.”
Rich Blake is a New York City-based freelance financial journalist. He currently contributes to Institutional Investor magazine, Reuters HedgeWorld and ABCNews.com, among others.
