The SEC’s New Financial Sniffing Tools

Crowdfunding, Securities, Stock

Beginning this year, as described by SEC’s Chair Mary Jo White at the Chair Mary Jo White at the 41st Annual Securities Regulation Institute on January 27, 2014, described some of the new tools and systems the SEC would be using in 2014.

Examiners in the Commission’s Quantitative Analytics Unit of its National Exam Program will use a new financial monitoring tool called the National Exam Analytics Tool (“NEAT”).  It will be used to look for possible insider trading. In addition it will sniff out potential front running, window dressing, improper allocation of investment opportunities and other potential financial wrongdoings.  Ms. White summarized NEAT’s potential thusly:

With NEAT, our examiners are able to access and systematically analyze massive amounts of trading data from firms in a fraction of the time it has taken in years past. In one recent exam, our exam team used NEAT to analyze in 36 hours literally 17 million transactions executed by one investment adviser.

Among its many uses, NEAT can search for evidence of potential insider trading by comparing a database of significant corporate activity like mergers against the companies in which a registrant is trading and analyze how the registrant traded at the time of those significant events. NEAT can review all the securities the registrant traded and quickly identify the trading patterns of the registrant for suspicious activity.

In 2014, our examiners will be using the NEAT analytics to identify signs of not only possible insider trading, but also front running, window dressing, improper allocations of investment opportunities, and other kinds of misconduct.

The SEC is also rolling out another tool which it calls the Market Information Data Analytics System or MIDAS, which will collect an enormous amount of trading data and allow it to be sorted through and reviewed.  Regarding MIDAS, Ms. White stated:
Every day, MIDAS collects one billion records of trading data, time-stamped to the microsecond. Previously, only sophisticated market participants had access to this type and amount of trading data and even fewer were able to process it. At the SEC of 2014, we are aggregating this data and presenting it on our website along with a wide range of analyses. We have made these analyses readily accessible on your computer or even your tablet, with data available in clear, easy-to-read charts and graphs.MIDAS is already revealing some important, data-based realities that may resolve some of the speculations about behavior in today’s market structure. Just earlier this month, for example, the SEC staff published an analysis showing that for the most part the advent of public transparency for “odd lot” trades does not seem to correspond with a decline in such trades. The staff noted that this result suggests that a lack of transparency may not have been one of the drivers for breaking trades into odd lots, which some observers have suggested is a technique to hide trading activity.

In the coming weeks, we are expecting to post further staff analysis of off-exchange trading, a review of research on high-frequency trading, and a data series on depth-of-book liquidity.

This is all actually pretty interesting and really probably should have been in place earlier than 2014.  Either way it should give the SEC more data to allow for easier (and earlier) identification of financial manipulations and wrongdoings.  Which is a good thing, as the SEC still has its hands full getting the Dodd Frank and the Regulation Crowdfunding regulations together.