The five month investigation into the 6 May US flash crash has been widely publicised and everyone and their dog has been fixated on the impact of high frequency trading on the markets at large. However, the investigation has also raised regulatory awareness of the underlying data inadequacies that lie at the heart of the industry. To this end, Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), discussed the identification challenges the regulator faced throughout the investigation during a testimony before a Senate committee this week.
Gensler noted that by the morning of the 7 May, the CFTC had all of the transaction and open position data for the previous day, during which the flash crash occurred. The regulator also asked for the full order book data for the day, which is not currently required as part of its regulatory reporting remit. “This was a tremendous effort to collect and analyse an enormous data file that included more than 14 million messages just for one day in the lead month of the E-Mini,” he said.
As well as the volume of the data the regulator was required to sift through, the lack of identification standards for individuals involved in trading was another sticking point. “Though we do get daily futures data, it is currently missing an important bit of information: we receive traders’ account numbers, but we do not get the identity of the owner or controller of that account. Over time, CFTC staff has manually identified traders associated with a significant number of the more active trading accounts. The Commission published a proposed rule in July of this year that will, if finalised, require automated identification of account ownership and control,” said Gensler.
The proposed rule that Gensler is referring to relates to new ownership and control report (OCR) requirements, which have been the subject of much debate over the last few months. According to the proposals, OCR data would include entity information including trading account numbers, the names and addresses of accounts’ owners and controllers, owners’ and controllers’ dates of birth and other information necessary to uniquely identify owners and controllers to identify related trading accounts.
Gensler noted in his recent speech that the swaps market may not have played a major role in the flash crash, but such data standards need to be introduced before such an event could reoccur in the future. “That is why I think it is very important that Congress has given regulators the authority to require swap dealers to provide swaps data to trade repositories that must make the data available to regulators. The CFTC has a rule out for public comment that would allow us to see all the data in the swaps markets that we see in the futures markets. Additionally, the CFTC will need to establish data linkages between swaps and futures data to conduct financial risk surveillance, market surveillance, economic analysis and enforcement investigations across markets,” he said.
Data standards are clearly on the minds of the regulatory community at large, but, as noted recently by Guy Sears, director of Wholesale at the Investment Management Association (IMA), the industry can’t afford to let regulators define the best standards to mandate. It is up to the market to provide guidance.
Gensler’s full speech is available to view here.