The Securities and Exchange Commission today proposed a new rule that 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.
A consolidated audit trail system would 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. Stock market regulators tracking suspicious market activity or reconstructing an unusual event must obtain and merge an immense volume of disparate data from a number of different markets and market participants. Regulators are seeking more efficient access to data through a far more robust and effective cross-market order and execution tracking system.
"If adopted, this consolidated audit trail would, for the first time ever, allow the SEC and other market regulators to track trade data across multiple markets, products and participants in real time," said SEC chairman Mary L. Schapiro. "It would allow us to rapidly reconstruct trading activity and quickly analyze both suspicious trading behavior and unusual market events."
Last year, the SEC set up an agency-wide task force to carry out the audit trail initiative and begin the process of developing the rulemaking proposal recommended to the Commission today.
The SEC’s proposal seeks public comment and data on a broad range of issues relating to a consolidated audit trail. Public comments on the proposal should be received by the Commission within 60 days of its publication in the Federal Register.
FACT SHEET
Background
As the events of May 6 made clear, today’s securities markets are highly automated, and trading activity is widely dispersed across many trading centers. Due to rapid technological advances, trades are now transacted in a matter of milliseconds.
Such dispersed, automated trading activity makes it more challenging for SROs and the SEC to conduct cross-market supervision of trading activities and oversight of the securities markets and market participants.
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. And, the existing audit trail requirements vary significantly among markets. That means that regulators, when conducting a cross-market analysis, must obtain and merge together a large volume of disparate data from different entities.
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."
As such, there is a heightened need for a uniform, consolidated cross-market order and execution tracking system.
Goals of the Proposal
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.
Requirements of the Proposed Rule
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.
Timeline of the Proposed Rule
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.
Recent Commission Actions on Market Structure
Today’s proposal is part of a larger effort by the SEC to help ensure that the markets are fair, transparent and efficient. Among other things, the Commission already has proposed rules that would:
* Effectively prohibit all markets from displaying marketable flash orders.
* Generally require that information about an investor’s interest in buying or selling a stock be made publicly available, instead of just to a select group operating with a dark pool.
* Effectively prohibit broker-dealers from providing their customers with unfiltered access to exchanges and alternative trading systems — and that would help to assure that broker-dealers implement appropriate risk controls.
* Help identify and provide information on certain large traders.
* Promote fair and efficient access to listed options markets.
The Commission also has sought public comment on a concept release covering a wide range of topics concerning the equity markets to help facilitate the SEC’s ongoing review of market structure issues.
