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News March 7, 2011 Issue

SEC Investigating Alpha Capture Systems

Alpha capture systems, those aggregators and trackers of sell-side trading ideas, have got the SEC curious and it wants to know more.

Recently, the SEC began requesting information on a voluntary basis about the use of research analyst surveys and alpha capture systems. The brief, barely more than page-and-a-half request asks for information such as:

  • whether the firm has participated in any research surveys or alpha capture systems;
  • if the firm is compensated directly or indirectly or compensates others related to any such participation;
  • what steps the firm has taken to ensure that information obtained from such surveys or programs does not contain material, non-public information;
  • the names of parties participating in any research surveys, the extent of the practice, and manner in which research surveys are conducted;
  • the identity of any alpha capture systems used now or in the past by the firm;
  • a description of the information received from alpha capture systems and the records the firm maintains regarding such information; and
  • any policies and procedures relating to the use of alpha capture systems.

"This is a non-public, fact-finding investigation," said the SEC’s request letter. "We are trying to determine whether there have been any violations of the federal securities laws. Neither the investigation nor this request means that we have concluded that you or anyone else has broken the law. Also, the investigation does not mean that we have a negative opinion of any person, entity, or security."

The birth of alpha capture systems is credited to UK firm Marshall Wace in 2001. The systems communicate trading ideas along with market information that reflects the real-time value of the idea. Alpha capture data is typically used along with other information gathered by asset managers when making trading or investment decisions.

Alpha capture platforms such as Thomson ReutersStarMine, and Trade Ideas, founded by a consortium of broker-dealers including Merrill Lynch, Citigroup, and Credit Suisse, offer external information resources, although some firms have their own internal alpha capture systems.

In 2006, the UK Financial Services Authority (FSA) did a sweep of its own on alpha capture systems, and found that if anything, the systems may reduce certain risks because of the extensive documentation of data the systems entail. Because the systems have a complete audit trail, "the FSA acknowledged that the risk of conveying trade ideas over alpha capture systems might be lower than traditional communication methods, though it noted that some risk still might exist," said Wall Street Technology’s Ivy Schmerken.