Kill switches are getting the most attention as a means to prevent disorderly trading in the public markets. But reconciling “drop copy” reports from exchanges on trades 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 this month’s Market 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. In the reconciliation process, brokers can identify and eliminate erroneous orders before they pile up. 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.”
Discussion of having exchanges set up kill switches and the use of drop copies stems from the Knight Capital Group debacle of August 1 when the big market maker lost control of its trading algorithms. The firm nearly failed and took a $457.6 million charge against its third quarter earnings, from trading losses.
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 this month. “They do seem like a promising safeguard.”