This past Wednesday the SEC announced a proposed new rule that, if adopted, would require the self-regulatory organizations (SROs) to establish a consolidated audit trail system that would enable regulators to track information related to trading orders received and executed across the securities markets.
The SEC is proposing this system in order to help regulators keep pace with new technology and trading patterns in the markets.
Currently, there is no single database of comprehensive and readily accessible data regarding orders and executions. Instead, each SRO uses its own separate audit trail systems to track information relating to orders in its respective markets. Moreover, the existing audit trail requirements vary significantly among markets. This disparity and diversity across SROs presents a significant challenge for regulators conducting a cross-market analysis, because they must obtain and merge together a large volume of disparate data from different entities.
Moreover, as illustrated by the events of May 6, the highly automated nature of today’s securities markets, and the fact that trading activity is widely dispersed across many trading centers, makes it that much more challenging for SROs and the SEC to conduct cross-market supervision of trading activities and oversight of the securities markets and market participants.
As SEC Chairman Mary Schapiro said when first announcing the audit trail initiative earlier this year:
“It is like trying to put together a jigsaw puzzle, but only being able to see a small part of the final picture. To see the complete picture, regulators must have access to a robust and effective consolidated order and transaction tracking system.”
This rulemaking proposal recommended to the SEC reflects the combined work of an agency-wide task force set up to carry out the audit trail initiative announced by Chairman Schapiro last year.
As stated in the SEC’s press release, the proposed consolidated audit trail is intended to:
- Provide regulators direct and timely access to uniform consolidated order and execution information for all orders in National Market System (NMS) securities from all market participants across all markets.
- Enable SROs to better fulfill their regulatory responsibilities to oversee their markets and their members.
- Enable the SEC to better carry out its oversight of the NMS for securities and to perform rapid and accurate market analysis.
Under the proposed rule (Rule 613), SROs would file jointly with the Commission an NMS plan to create, implement, and maintain a consolidated audit trail. Then, the SROs would file proposed rule changes requiring their members to comply with the plan.
The proposed rule, which would initially apply to all NMS stocks and listed options, would:
- Require every exchange and FINRA, as well as their respective members, to provide certain detailed information to a newly created central repository regarding each quote and order in an NMS security, and each reportable event with respect to each quote and order.
- Require SROs and their members to provide a majority of the required order and event information to the central repository in real time or close to real time.
- Require each member of an exchange or FINRA to “tag” each order received or originated by the member with a unique order identifier that would be reported to the central repository. The identifier would stay with that order throughout its life, including routing, modification, execution, and cancellation;
- Require each customer to be assigned a unique customer identifier that would be the same for that customer, in a uniform format, across all broker-dealers.
- Require that each exchange, and their members, synchronize their business clocks.
- Require that the NMS plan include policies and procedures to ensure the security and confidentiality of all information submitted to the central repository.
- Require SROs to improve their surveillance systems to make use of the consolidated audit trail data.
The central repository would be jointly owned and operated by the exchanges and FINRA. The central repository would receive, consolidate, and retain all data submitted by the SROs and their members.
The exchanges, FINRA and the SEC would have access to the data collected by the central repository for purposes of performing their respective regulatory and oversight functions.
If adopted, it is expected that the proposed rule will ultimately be expanded to cover other securities.
The proposed rule would provide for a phased approach to implementation, requiring:
- The Exchanges and FINRA to submit an NMS plan to the Commission within 90 days of approval of the proposed rule.
- The Exchanges and FINRA to provide to the central repository the required data within one year after effectiveness of the NMS plan.
- Members of the Exchanges and FINRA to provide to the central repository the required data within two years after effectiveness of the NMS plan.
The SEC’s proposal, which can be viewed on the SEC’s website by clicking here, seeks public comment and data on a broad range of issues relating to a consolidated audit trail.
Public comments on the proposal can be submitting by clicking here, and should be received by the Commission within 60 days of its publication in the Federal Register.