Google, operator of the dominant set of data centers for indexing and searching for content on the World Wide Web, said it intends to submit a bid to build a consolidated audit trail of all stock and options quotes, orders and trade details for the Securities and Exchange Commission.
The Internet search giant will face off with a who’s who of the securities industry, including NYSE Technologies, the commercial arm of the company that owns the New York Stock Exchange; Nasdaq OMX Group, its chief rival in selling trading technology to exchanges around the world; and BATS Global Markets, an eight-year-old company that has used high-speed trading systems to take over about 10 percent of the nation’s trading in stocks on its two all-electronic national exchanges.
GOOGLING GOOGLE
Locations of Google Data Centers Around the World
Those exchange operators will, in turn, be submitting bids in competition not just with each other, but the Financial Industry Regulatory Authority, the regulator of brokers whose chief executive, Richard Ketchum, signaled in early 2010 an interest in creating and managing a database that would hold all the nation’s trading details for review by itself and the Securities and Exchange Commission.
FINRA, BATS, Nasdaq and NYSE Euronext all face potential conflicts of interest in submitting their bids. They all are part of the industry group charged by the SEC with formulating the overall plan to create the audit trail and pick the best bid to produce and manage the system.
“For many good reasons including technical and market expertise, the SEC tasked the exchanges to develop and manage the Consolidated Audit Trail process under its oversight and approval,’’ said Richard Adamonis, senior vice president of corporate communications at NYSE Euronext, owner of NYSE Technologies. “The proposal, like the entire process, is highly transparent and open for public comment.”
The potential conflicts are not likely to be show-stoppers, however. “If they end up going with a firm that is part of the working group, they will have to come out with clear criteria in terms of how they won the project,” said Sang Lee, managing partner of industry consultancy Aite Group. “I would say it is almost a disadvantage to be on the working group and also a bidder. At least, (such a bidder would) have a higher public perception hurdle to overcome.”
The audit trail plan is a response to the May 6, 2010, flash crash, which revealed how ill-equipped the nation’s regulators were to analyze market disruptions.
The staffs of the SEC and the Commodity Futures Trading Commission took five months to piece together details of what happened on that date to trigger a 600-point drop in the Dow Jones Industrial Average in a matter of minutes that afternoon; and, a similarly speedy bounceback.
Also announcing their intents to bid are a variety of the industry’s best-known technology suppliers, including SunGard Data Systems, Cinnober Financial Technology and Tradeworx, which is already creating a real-time database of trade details on public markets for the SEC; financial information service Thomson Reuters; consultancies that include Capgemini Financial Services, Grant Thornton, Wipro, Infosys, and Sapient; and the International Business Machines Corporation, the largest provider of information systems services.
“This has always been a competition between the large integrators such as IBMs of this world and the smaller and more targeted niche providers like Tradeworx,” said Larry Tabb, founder of industry consultancy and research firm Tabb Group. “The reason so many players are vying for this assignment is because of the price tag that has been tied to this project: $4 billion to develop the CAT and $2 billion a year to maintain it. Now those numbers have been revised down, but even at lower levels, the numbers associated with this are very high.”
Google, for its part, has been at the forefront of building databases that run on cheap, purpose-built servers, which it designs itself. The company is believed to own and operate more than one million servers in data centers around the world. Each day, its servers handle more than one billion search requests and add about 24 petabytes of data generated by users of the Internet.
A petabyte equates to one quadrillion characters of information.
“Google actually created the standard for managing very large data sets across a widely distributed technology architecture composed of low priced commodity hardware,” known as Hadoop, Tabb said.
In its request for proposals, issued in February, the industry working group charged with picking the winning bid envisioned an audit trail system capable of taking in 5 terabytes of data a day. By the end of the first year, the database behind the audit trail would store 2 petabytes of information. By the end of year 5: 21 petabytes.
Participants in the working group include representatives of the BATS exchanges, the Nasdaq OMX exchanges, the NYSE Euronext exchanges, the Direct Edge exchanges, FINRA, the C2 Options Exchange, the Chicago Stock Exchange, the International Securities Exchange, the MIAX Options Exchange, and the National Stock Exchange.
Under the SEC’s Rule 613 that ordered creation of the plan, these organizations constitute the “plan sponsors” and “have flexibility under the Rule to determine the governance structures that will facilitate the effective and efficient oversight of the plan processor,’’ the name for the winning bidder that will build and manage the operation of the resulting system.
Those “structures’ include means of resolving potential conflicts of interest, should sponsors also submit bids. The sponsors also can establish an Advisory Committee, to assist them in the selection process.
NYSE Technologies competes directly with Nasdaq OMX Group to sell trading technology and communications services to exchanges around the world. Last year, NYSE Euronext derived $341 million of revenue from technology services, according to its 10-K report to the SEC. Nasdaq OMX took in $184 million from market technology.
Bidders will participate in a conference call Friday (March 8) on how the process for taking in proposals will work.
