A pedestrian holding an umbrella stands in front of a stock quotation board displaying currency exchange rates outside a brokerage in Tokyo

Wall Street regulator says futures should be part of audit trail plan

By Suzanne Barlyn and Sarah N. Lynch

(Reuters) – Futures market trading data should be part of a new audit trail that is being developed to ensure that regulators can police markets across asset classes, a top Wall Street regulator said Friday.

The move to eventually include futures would be “logical” Richard Ketchum, the Financial Industry Regulatory Authority’s (FINRA) chief executive, said on the sidelines of a congressional hearing.

Ketchum testified earlier about FINRA’s oversight of brokerage activities. Although FINRA, the Wall-Street funded industry watchdog, currently conducts extensive surveillance of equity and debt markets, many data gaps still exist.

For instance, FINRA has no direct window into trading in swaps or futures – asset classes regulated by the U.S. Commodity Futures Trading Commission.

In addition, there is no way to easily track trading across the highly fragmented U.S. stock market, which consists of numerous exchanges, dark pools and other platforms.

The Securities and Exchange Commission adopted a rule in July 2012 calling for the creation of a consolidated audit trail (CAT), which would establish a central data base for every trade order, execution and cancellation.

The SEC is currently reviewing a blueprint that FINRA and the exchanges delivered in September outlining how to construct the mammoth system. Six bidders, including FINRA, are competing to build it.

But unless the SEC and CFTC join forces, any final CAT program will not contain futures data.

Ketchum said Friday that the May 6, 2010, flash crash had made it clear that futures “are a key part of the activity that occurs in equity financial markets” and he would be supportive of efforts to eventually expand the scope of the CAT.

About $1 trillion was briefly wiped out from the U.S. stock market in the flash crash, after massive selling and volatility in the futures market bled into the equities market.

Ketchum’s comments come just one week after a London-based futures trader, Navinder Singh Sarao, was arrested over charges he used a high-speed automated program to manipulate futures contracts pegged to the S&P 500 index.

Authorities say Sarao’s trades helped contribute to volatile market conditions on the day of the crash.

When the SEC adopted the CAT in 2012, it acknowledged including futures was a good idea. But the agency lacks the authority to oversee the asset class.

The SEC directed its staff to work with the CFTC and other regulators to determine how other asset classes might be added to the system, according the order.

(Additional reporting by Herbert Lash)


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