The 2014 budget of the New York Police Department is $4.6 billion dollars which is mostly funded by the taxpayers of New York City.  The NYPD employs 35,000 uniformed police officers who risk their lives every day to protect the 8.3 million citizens of New York City.   To ensure that safety, the NYPD increased last year’s police academy class by 500 to 1,250 new officers.  In addition to personnel, the NYPD knows they need to constantly upgrade their computer and communications equipment to keep their city safe from predators and have budgeted $215 million over the next four years for their Capital Strategy Program.

The people of New York City can feel safe knowing that their police are well funded and well prepared with the most up to date equipment. But what about the investors in the US stock market, can they feel safe knowing that their police, the Securities and Exchange Commission, are well funded and up to date with the latest computer and communications equipment?  Sadly, the SEC falls woefully short on this measure.

The problem with the SEC starts with their lack of funding.  The SEC requested $1.67 billion from Congress for this fiscal year but was only granted a budget of $1.35 billion.  According to the Washington Post , “The SEC asked for more staff to cope with new responsibilities under the Dodd-Frank Act and another relatively new law designed to help fledgling firms grow. The agency also cited a severe shortage of examiners. Last year, it examined only 9 percent of the 11,000 investment advisers it regulates.”  To make matters worse, Congress last week took away half of a special $50 million fund that was set up for special multi-year projects for the SEC (projects that were funded with this money included the new MIDAS surveillance system).

While the efforts of the NYPD are clearly paying off with reduced crime rates (homicides fell 36 percent from 2001 to 2012, and all major felonies went down 31 percent, while crime in the rest of the country stayed flat), the SEC continues to be embarrassed by the likes of Flash Crashes and Bernie Madoff.  Even worse, the SEC doesn’t seem to have the capability to identify possible new crimes that may be occurring since their computer systems lack the expertise that is needed now in the sub-second trading world.  The SEC has acknowledged this fact and has approved a new system called the Consolidated Audit Trail (CAT) but this is years away from completion.  And considering how Congress is decimating their budget, we doubt that the funds will be ever be available to build the CAT.

The NY Post offered this explanation for NYC’s continues crime rate drop:

“New York’s crime rate fell twice as far as in the rest of the country. The only significant input that changed in New York since the early ’90s was its style of policing.  In 1994, under then-Commissioner William Bratton, the NYPD embraced the revolutionary idea of stopping crime before it happens, rather than just reacting after the fact by making an arrest. It began scrutinizing crime data daily and targeting its resources to where crime patterns were emerging.”

We would argue that if the SEC were properly funded, they too could act like the NYPD and start to spot crimes before they even happen. With the proper personnel and surveillance equipment, the SEC would be able to scrutinize data and target its resources where patterns emerge just like the NYPD has done.  If bad guys like predatory HFT’s and insider traders knew that the SEC were watching their every move, they most likely would think twice about engaging in any nefarious behavior.