|Martha Stokes, C.M.T. is the co-founder and CEO of TechniTrader®, an
educational firm dedicated to helping small investors and retail traders. Since 1998,
SEC Consolidated Audit Trail and Cloud Technology
By Martha Stokes, CMT
A while ago I wrote a report regarding GOOG’s interest in submitting for the SEC’s CAT contract. This contract, when awarded, will be a huge opportunity for the winning company. However until recently, the question was how CAT would function in a market undergoing massive structural changes and technological advances spanning numerous financial markets, exchanges, ATS, and global connections. There are over 100 “market fragments,” aka platforms, and managing all of these under a CAT is a daunting task. The goal is mostly to stabilize and mitigate the risk of future flash crashes caused by market voids where liquidity suddenly disappears, which is the most common reason why the risk of a flash crash increases on certain stocks in any given day.
There seemed to be no computer or software able to crunch the astounding number of transaction details. The SEC office of Analytics and Research was tasked with finding a solution to several new SEC high-tech initiatives. The problem is resources, the constraint of budget, people, and technology that stifle the SEC’s ability to act, engage, and control the big banks, hedge funds, and other entities’ activities across complex platforms, systems, and markets.
Skeptics have been vocal, citing that every institution at every level and every activity would need to be recorded and retrievable real-time, and that poses a gargantuan problem, mostly with computers.
That is why after the May 2010 flash crash, the SEC required more curbs to lower the risk of a flash crash, but the current curbs are a knee-jerk reaction to an event already underway. A solution came from a surprising industry as concern over the risk of flash crashes and how to avoid such a disabling market fiasco, heats up in debates.
Flash crash risk has increased dramatically since the switch from fractions to decimals. The original theory that decimals would make for a far more “efficient market” had the unintended effect of increasing the risk of voids, pockets of volume evaporation on both sides of the trade which can create a sudden flash crash. Add to that the High Frequency Traders HFTs driving huge volumes on computer triggered orders based on events, and the risk of a flash crash just increased multi-fold.
The analysis is exceedingly complex. Trading volume needs to be evaluated real time with identifiers to measure the buy and sell imbalances in volume and time instead of clock time. In addition, it needs to protect the highly sensitive proprietary data of institutions while identifying each institution’s activity. What they are trying to determine is large lot versus small lot, in conjunction with Denial of Service anomalies, which result in a sudden evaporation of liquidity on both sides of the trade.
The computer scientists and mathematicians of Lawrence Berkeley National Laboratory which is a government sponsored lab, have a super computer capable of crunching petabytes of data for scientific research. This is part of the Cloud technology that has emerged in recent years from hardware companies such as IBM.
High energy Physics data is ultra-massive data, far larger Big Data analysis than all of the market volumes across all financial markets. So instead of looking at a typical computer system designed for the financial markets, they are employing computers used for calculating the big data of Physics. The Center for Innovative Financial Technology has used this super computer to determine the predictability of flash crashes with fascinating results.
What these scientists have done is create an early warning system that a void and risk of a flash crash is imminent. Volume Synchronized Probability of Informed Trading, or VPIN, and the Herfindahl -Hirschman Index, HHT of market fragmentation, are being tested as early warning systems that would be implemented as part of the CAT system. This would allow the SEC to anticipate flash crashes and instigate better controls to reduce the threat.
This research is in its earliest stages and takes time to develop fully and test thoroughly, but the SEC along with this government lab are working on ways of insuring the stability of the financial markets so that future flash crash risk is greatly diminished.
Martha Stokes, CMT and CEO of TechniTrader®
TechniTrader® the Gold Standard in Stock Market Education™
Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
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