USPS Offers to Battle Rain, Sleet, Snow for Late Trade Solution

May 18, 2004 ( - The government agency that pledges to fight through any weather to accomplish its mission now says it can bring that tenaciousness to solving a key issue underlying the current mutual fund industry trading scandal.

The United States Postal Service (USPS) has told federal regulators that its newest secure time/date technology can create an electronic postmark to verify that a fund trade came in before the 4 p.m. cutoff and can also detect efforts to tamper with the time reading, the Boston Globe reported.

The issue is at the heart of the continuing federal/state probe into abusive trading practices that has focused on market timing and late trading allegations. Pending “hard close” regulations would require that all share trades be submitted to fund companies or their trade-clearing agent by 4 p.m. – a notion that has drawn storms of industry protests that such a move would effectively disenfranchise large blocks of investors (See  SEC Rethinking Hard Close Proposal ).

In its proposal to federal regulators, USPS officials have pointed out that allowing it to time stamp fund trades has the power of federal law behind it, since it is a crime to tamper with documents in its system. “We’re a disinterested third party,” Chuck Chamberlain, who runs the electronic postmark project for the USPS, told the Globe. “There’s nobody to bribe in this system. No single person has access to the system whereby they could manufacture a transaction or alter one without being detected.”

Based on Atomic Clock

Like many electronic time-stamping programs, the Postal Service time clock is based on the atomic clock maintained by the US government, which eliminates the opportunity for corrupt insiders at financial firms to manipulate the time on internal computer systems to make it look like a late trade was executed before 4 p.m.

Once the program is installed, users activate the postmarking program by clicking the blue icon of the Postal Service eagle mascot. The Postal Service’s software imprints digital signatures and electronic postmarks, which look much like current paper postmarks, on documents prepared in Microsoft Word. The postmark also seals the document by creating a unique coded record of the specific contents of each individual document using computer algorithms. Proponents have compared this “hash code,” as it’s called, to an electronic fingerprint or DNA code in which, just as in biology, no two are alike and each represents a unique set of facts in the documents.

The Postal Service stores the hash code in its secure data centers. Recipients of the document – in this case mutual fund companies receiving a trade – would then use the postmarking software to verify with USPS technology partner AuthentiDate that the contents match the hash code.

“If anyone tried to change the document, it would compute a different hash code, and later, when you did an audit or check, it would not match the original code, and that would indicate it was changed or tampered with,” said Michael Wolf, chief technology officer of AuthentiDate, a New York City firm.

The NSCC Proposal

At the other end of the spectrum from the Postal Service proposal is a solution being pushed by Fidelity Investments and other mutual fund players that would use simpler time-stamping technology and procedures, which they say would end the trading abuses at less cost.

Fidelity and other firms are backing a simpler technical solution that would require all mutual fund orders to be routed by 4 p.m. to a single trade-processing operation, the National Securities Clearing Corp., (NSCC), which already handles much of the trades made in the industry each day. The NSCC would certify each trade with commonly available time-stamping technology linked to the government’s atomic clock, notify mutual fund companies of that day’s transactions, and keep a record of the trade.

Proponents of this approach say that once the trade is in the hands of NSCC, an independent company regulated by the SEC, it can’t be tampered with by an unscrupulous trader.   NSCC said it would cost $5 million to beef up its computer systems to accommodate increased trading activity. It currently charges 17.5 cents to process a transaction, while the Postal Service would charge 10 to 80 cents to postmark each mutual fund transaction. The SEC said there were 166 million mutual fund trades in 2002.