Manoj Narang, CEO of Tradeworx, is seen in offices in Red Bank, NJ. The Securities… (Jennifer S. Altman/For…)
As computing power and big data have revolutionized stock trading in recent years, one market player has lagged far behind: the Securities and Exchange Commission, whose job policing the markets has been hampered by a serious technology gap.
Now the SEC is trying to catch up.
This month, the agency is in the final phases of testing software that will stream real-time trade data into its headquarters near Union Station, helping regulators better grasp the market’s plumbing. The technology should go live in early 2013, at a cost of $2.5 million for the year.
“What we’re giving them is public data that they need in order to figure out what happened at any given moment of the trading day or reconstruct events,” said Manoj Narang, 43, whose company — Tradeworx, based in Red Bank, N.J. — created the SEC’s new software. “To me, there’s no substitute for the regulator having the capability to discover the answers on its own without any bias from outside parties.”
But the true value of the technology will ultimately turn on whether the SEC, long known more for its lawyers than for its technologists, can lure the expertise needed to make sense of the data and use them properly. The agency’s credibility has suffered from a series of high-profile bugs and glitches in recent years that has shaken public confidence in the marketplace, such as the botched offering of Facebook’s stock and the runaway trades linked to faulty computers at Knight Capital this year.
But the incident that came to define the SEC’s shortcomings was the “flash crash” on May 6, 2010, when the stock market plunged nearly 1,000 points in minutes then whipsawed back up.
It took the SEC about four months to unwind the billions of orders that took place that day and issue a report of what happened. Although the SEC started collecting the data in June 2010, it could not aggregate them into a single database for analysis until three months later. Even the seemingly simple task of matching a quote with a trade price proved tough.
The wide gulf in technical prowess between the regulators and the regulated became painfully clear that year, prompting the SEC to explore hiring an outside firm that could gather up-to-the-minute market feeds from the public exchanges. It selected Tradeworx in June, but it declined to disclose how many other firms competed for the contract.
“Instead of building everything from scratch and hiring teams of developers, we wanted to buy something that’s ready to go,” said Gregg Berman, a senior adviser to the SEC’s trading and markets division and a Princeton-trained nuclear physicist. The new system will be dubbed Midas, for Market Information Data Analytics System.
Tradeworx was no stranger to the SEC when it won the contract.
When Narang and his brother co-founded the company in 1999, during the height of the dot-com bubble, they were looking to create online personal finance tools for mom-and-pop investors. One of their first, a product aimed at helping investors calculate their margin risk, was bought by the SEC in 2000 and displayed on its Web site, Narang said.
But the dot-com bubble burst, and the terrorist attacks of Sept. 11, 2001, followed soon after, placing extreme pressure on the company. Instead of folding, Tradeworx morphed into a hedge fund in 2003 and later added a proprietary trading division, which uses high-speed, blink-of-an-eye trading techniques that rely on complex computer algorithms.
“Trading was a survival tactic for us,” said Narang, who was trained in math and computer science at MIT.
The firm’s next interaction with the SEC came a few months before the 2010 flash crash, when high-speed trading came under regulatory scrutiny. Concerned that the prevalence of high-frequency traders such as Tradeworx would undermine long-term investors’ interests, the SEC began asking questions and inviting public input.
Thus began Narang’s dialogue with the SEC, followed by testimony on Capitol Hill and plenty of news media attention. The questions that regulators were posing could be answered empirically with the right technology, Narang said. The goal was to show them that they could make data-driven policy decisions.
“We weren’t trying to sell anything,” Narang said. In fact, Tradeworx had nothing to sell at that point. Its in-house tools were not commercialized, he said. But after the SEC started shopping around for technology in 2011, Tradeworx tweaked its software and threw its hat into the ring.
Through Tradeworx, the SEC will get up-to-the-minute feeds directly from the exchanges, where Tradeworx keeps its servers. It will also get tools needed to organize the massive data feeds, run complicated searches, spot anomalies and test market theories. It could even drill down into the orders, isolate a specific stock and track how it traded every microsecond of the day on one exchange — or all of the exchanges.