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November 1, 2012

Drop Copies Get On the Radar

By Peter Chapman

Kill switches are getting the most attention as a means to prevent disorderly trading in the public markets, but exchange "drop copy" reports are increasingly on the radar. At least one big broker-dealer believes the Securities and Exchange Commission should mandate their usage.

"That independent view is critical," Jonathan Ross, Getco's chief technology officer, told SEC officials at last month's Technology Roundtable, sponsored by the regulator. "Any institution worth its salt spends the resources to build that independent view of the impact they are having on the market in real time."

Drop copies are electronic files sent by exchanges to brokers delineating their most recent trades. Firms reconcile their own trading records against the drop copy information. Most exchanges deliver the information in real time, but not all.

In a letter to the SEC, Getco, which is one of the industry's largest market makers, told the regulator it "should consider requiring broker-dealer participants to use [drop copies] to monitor their trading records."

The current discussion of exchange kill switches (See article on Page 18.) and drop copies stems from the Knight Capital Group debacle of August 1 when the big market maker lost control of its trading algorithms.

At the SEC roundtable, other industry officials also expressed support for the use of drop copies as risk management tools. "We think there is a lot that can be done in the drop copy area," said Sudhanshu Arya, a managing director with Investment Technology Group. "We would love to find ways to make them real time for all exchanges."

The SEC has taken note. "[Drop copies] seem like a terrific idea," said James Burns, a deputy director in the SEC's division of trading and markets, at a market structure conference sponsored by the Securities Industry and Financial Markets Association last month. "They do seem like a promising safeguard."


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