The Securities and Exchange Commission is outmanned and outgunned by the folks it is trying to police, according to an August 20 article in the Wall Street Journal by Tom McGinty and Kara Scannell. The SEC turned over daily surveillance of the markets to the markets’ own self-regulatory organizations (“SROs”) long ago. Now, under pressure from Congress and investors to prove it is up to the job, after its glaring failures in the Madoff Ponzi scheme and other scandals, Chairman Mary Shapiro’s SEC is trying desperately to catch up. But surveillance of complex modern markets requires “the quantitative, analytical capacity that the agency has never had,” observes Jonathan Katz, who left the SEC in 2006 after 20 years as secretary.
In recent statements, SEC officials have admitted the SEC lacks, but is now seeking develop, the high tech tools to monitor the markets on a real time basis, and the expertise to understand what is going on. Ms. Shapiro told Congress that the SEC is “seeking to develop systems to mine data from multiple sources’and enhancing training for our staff and also recruiting additional professionals with expertise in securities training, portfolio management, valuation, forensic accounting, information security, derivatives and synthetic products and risk management,” according to the article.
Back in the 1980s, the SEC “toyed with” its own Market Oversight Surveillance System (“MOSS”), which the article describes as a computer program that plugged the SEC into trading data generated by the newly electronic markets. The SROs “complained bitterly that MOSS usurped their authority,” and the SEC discontinued MOSS after the SROs promised they would beef up their policing.
With the exponential rate of growth of technology, today’s markets are far faster and more complex than in the 1980s. Among other things, regulators must monitor “flash orders” and “dark pools.” Flash orders give some traders a look at orders before they are routed to other markets. Dark pools are electronic markets in which orders are matched without displaying all quotes publicly. Much trading is done by high-frequency traders, who electronically scan markets for opportunities and make rapid-fire buys and sells to lock in gains.
It remains to be seen whether Congress will commit sufficient funds to the SEC to permit effective regulation and whether the SEC will develop the tools and expertise necessary to police markets of ever increasing speed and complexity. Right now, it does not have them.
While this scenario plays out, one thing remains clear and that is the need for a strong bar of private attorneys to deal with the increasing complex abuses that are occurring in the capital markets.
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