A new system to overhaul insider trading investigations is due to be agreed as early as this week in the latest response from US regulators to growing concerns about the extent of illegal activity on global markets.
The plan, which has been the subject of negotiations for more than a year, is likely to be submitted to the US Securities and Exchange Commission.
The SEC will remain the main markets watchdog responsible for enforcing federal securities laws but the new system would reform the way stock exchanges, often the first lines of defence against illegal activity, handle cases they refer to the SEC.
Under the proposed measure, the nine US stock exchanges that now monitor insider dealing will cede their authority to two bodies, the New York Stock Exchange’s regulatory arm and the Financial Industry Regulatory Authority, which oversees broker-dealers.
People involved in the discussions say this shift to a more centralised system should lead to faster and more efficient oversight of illegal activity at a time when the potential for abuse is becoming more widespread.
“The growing competitiveness in trading means that fragmented slices of a single company’s stock trade in several exchanges,” said one person involved. “Everybody is basically looking at their own bits and might miss something.”
The move is being seen by some market participants as another step in an attempt to collaborate with other regulators around the world to tackle market abuse, including the UK’s Financial Services Authority, which recently ramped up efforts to crack down on insider trading.
Under the current system, NYSE and other stock exchanges – so-called self-regulatory organisations overseen by the SEC – monitor intra-day trading on their own venues.
Finra, a non-governmental body, monitors trading on some exchanges.
While the SROs have long co-operated and shared information on potential cases to be referred to the SEC, the detection of market abuse has become increasingly challenging. The SEC often relies on industry to self-police its own market participants.
Finra, NYSE regulators and the SEC declined to comment.
The agreement between the equity exchanges is part of efforts to consolidate regulatory supervision in the US and follows a similar plan that streamlined monitoring of options markets, approved by the SEC in 2006.