NMS Compliance Requires More Monitoring, Archiving

By Maria Trombly | Securities Industry News | September 18, 2006

The Securities and Exchange Commission is requiring full industry compliance with Regulation National Market System (NMS) by next May, and many Wall Street firms are scrambling to install monitoring and archiving technology to meet best-execution and related documentation requirements. "It's a lot of work," said Howard Lazar, director of the equity IT division at Credit Suisse. "This has been our number-one project for equities IT for 2006 and into 2007."

Lazar couldn't give a figure for how much the firm is spending on Reg NMS work, but "between hardware and time for our developers, it's a pretty big number," he said.

Credit Suisse doesn't rely on an outside vendor for its order management systems, so all the work had to be done in-house. The investment bank began to identify which applications would need to be upgraded back in January, Lazar said. That work is now mostly complete and the actual coding has begun. "We need to sweep the market, and do that in an automated fashion, so that it's done instantaneously and with minimal impact on the traders," he said.

The next step, he said, is to increase capacity. Transaction volume has roughly been doubling every year for the past few years, and the regulation will accelerate that. "Both in the number of quotes we're going to get from the exchanges and in the number of transactions, those volumes are going to increase tremendously," said Lazar.

Since beginning the effort to increase capacity in January, Credit Suisse is about two-thirds of the way through the project. The third part involves data storage: The bank must be able to demonstrate that it is compliant, which means storing all relevant information and then retrieving it for reports for internal-compliance or external-audit purposes.

The firm has purchased the necessary hardware, and "we've basically got the application complete that will write into that database," Lazar said. "We've specified the reports that we want to produce." Now Credit Suisse--like other Wall Street firms--is waiting for the stock exchanges to come back with their NMS plans and specifications. By February, the exchanges will have to put those plans into production, and that's when Lazar plans to begin his testing.

"There's a pilot phase starting in May with 250 securities," he said. "The final deadline for full compliance will be next July. But between February and May we plan on doing our own pre-pilot to ensure that we're comfortable with everything."

Balaji Yellavalli, head of the capital markets solutions group at India-based Infosys Technologies, said most tier-one firms are fairly well positioned to meet Reg NMS deadlines. As with Credit Suisse, the biggest issue for many is making required upgrades to trading and order-routing applications and supporting systems.

"A lot of our leading clients see an impact requiring major changes to front-, middle- and back-office systems," Yellavalli said. "The other priority is storage, but that isn't a great concern because firms are already budgeting for increased storage, sometimes even beyond Reg NMS requirements." He prefers to take a longer view of the challenge: "We see this as a stepping stone to larger, integrated compliance" encompassing the likes of the USA Patriot Act's anti-money-laundering measures and the Basel II bank capital requirements.