SEC Approves New Rule Requiring Consolidated Audit Trail to Monitor and Analyze Trading Activity

FOR IMMEDIATE RELEASE
2012-134

Washington, D.C., July 11, 2012The Securities and Exchange Commission today voted to require the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) to establish a market-wide consolidated audit trail that will significantly enhance regulators´ ability to monitor and analyze trading activity.

The new rule adopted by the Commission requires the exchanges and FINRA to jointly submit a comprehensive plan detailing how they would develop, implement, and maintain a consolidated audit trail that must collect and accurately identify every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options across all U.S. markets.

Currently, there is no single database of comprehensive and readily accessible data regarding orders and executions. Each SRO instead uses its own separate audit trail system to track information relating to orders in its respective markets. Existing audit trail requirements vary significantly among markets, which means that regulators must obtain and merge together large volumes of disparate data from different entities when analyzing market activity.

"A consolidated audit trail that accurately tracks orders throughout their lifecycle and identifies the broker-dealers handling them will provide us with an unprecedented ability to effectively oversee the markets we regulate," said SEC Chairman Mary Schapiro.

A consolidated audit trail will increase the data available to regulators investigating illegal activities such as insider trading and market manipulation, and it will significantly improve the ability to reconstruct broad-based market events in an accurate and timely manner. A consolidated audit trail also will significantly increase the ability of regulators to monitor overall market structure and assess how SEC rules are affecting the markets, and will reduce the regulatory data production burdens on SROs and broker-dealers by reducing the number of ad hoc requests from regulators presently.

The new rule becomes effective 60 days after its publication in the Federal Register. SROs are required to submit the NMS plan to the Commission within 270 days of the rule´s publication in the Federal Register. Once the Commission approves the NMS plan, the SROs are required to report the required data to the central repository within one year, and members of the SROs are required to report within two years. Certain small broker-dealers will have up to three years to report the data.

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FACT SHEET

Creating a Consolidated Audit Trail

SEC Open Meeting
July 11, 2012

Background

Today´s securities markets are highly automated, with trading activity widely dispersed across many trading centers. Due to rapid technological advances, trades are now transacted in a matter of milliseconds if not faster.

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 system 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 such, there is a heightened need for a uniform, consolidated cross-market order and execution tracking system.

The Final Rule

The Commission adopted Rule 613 to create a comprehensive consolidated audit trail that would allow regulators to efficiently and accurately track all activity throughout the U.S. markets in certain securities known as National Market System (NMS) securities.

Among other things, the rule requires SROs to jointly submit a plan – called an NMS plan – to create, implement and maintain a consolidated audit trail. The rule specifies the type of data to be collected, when the data is to be transmitted, and how the data is to be prepared for regulatory use.

In particular, the rule mandates that the NMS plan:

The rule allows the SROs to determine the specifics of how market participants would report data to the central repository. While this might allow for multiple electronic formats, the data must be reported in a way that enables the central repository to send it to regulators in a uniform electronic format.

It also allows small broker-dealers up to three years, rather than two years as proposed, from the effectiveness of the NMS plan to begin reporting the required data to the consolidated audit trail.

In addition, the final rule adds several new requirements regarding the process for developing and implementing the NMS plan. For example, the new rule mandates that the NMS plan:

Once the SROs have submitted their proposed plan to the SEC, the Commission will publish the plan for notice and comment by the public. In considering the approval of the plan, the Commission will conduct an economic analysis of the consolidated audit trail based in part on the specific details and cost estimates required to be provided by the SROs, and further informed by any comments received from the public.

Timeline

The rule becomes effective 60 days after the date of its publication in the Federal Register. Under the rule, the SROs are required to submit the NMS plan to the Commission within 270 days of the date of publication of the adopting release in the Federal Register. If and when the Commission approves the NMS plan, the SROs are required to report the required data to the central repository within one year after effectiveness of the NMS plan. Members of the SROs are required to report the required data to the central repository within two years after effectiveness of the NMS plans, with possible exceptions for members of the SROs that qualify as small broker-dealers.

Other Commission Actions on Market Structure

This action is part of a larger effort by the SEC to ensure that the markets are fair, transparent, and efficient.

Among other things the Commission already has undertaken:

The Commission also has sought public comment on a concept release about a wide range of topics concerning the equity markets to help facilitate the SEC´s ongoing review of market structure issues.