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SEC Approves National Market System to Better Track Trades

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The Securities and Exchange Commission (SEC) approved Wednesday a new rule requiring the national securities exchanges and self-regulatory organizations (SROs) like the Financial Industry Regulatory Authority (FINRA) to establish a marketwide consolidated audit trail that would allow regulators to better monitor and analyze trading activity.

Rule 613 requires the exchanges and SROs to jointly submit a comprehensive plan detailing how they would develop, implement and maintain such an audit trail. That consolidated audit trail, the SEC says, “would have to be able to collect and accurately identify every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options across all U.S. markets.”

Because today’s securities markets are highly automated, with trading activity “widely dispersed” across many trading centers, and “trades transacted in a matter of milliseconds if not faster,” the SEC says it is more challenging for SROs and the SEC to conduct “cross-market supervision of trading activities and oversight of the securities markets and market participants.” Therefore, the agency saw the pressing need for a “uniform, consolidated cross-market order and execution tracking system.”

SEC Chairwoman Mary Schapiro said in comments at the open hearing to adopt the rule that “from virtually the day I arrived at the SEC three-and-a-half years ago, I have talked about the importance of a consolidated audit trail and I am enormously pleased that we are moving ahead to make it a reality.”

In today’s competitive marketplace, Schapiro said, “trading is dispersed across a variety of market centers ranging from public venues, to private dark pools, to individual broker-dealers,” with the vast majority of trading now being performed by “automated computer algorithms used by many different kinds of market participants.”

Regulators, she said, “must be able to corral this vast amount of disparate data in a way that allows us to monitor, correlate and analyze a vast stream of market events and transactions. The availability and quality of trading data are central to the SEC’s ability to protect investors, and to maintain fair, orderly and efficient markets.”

Though FINRA and some of the exchanges currently maintain their own separate audit trail systems, Schapiro said, “there are numerous shortcomings regarding their accuracy, completeness, accessibility and timeliness.” These limitations, she continued, “make it impractical for regulators to readily follow orders as they are routed, aggregated, re-routed and disaggregated across multiple markets.”

Schapiro pointed to the “flash crash” of May 6, 2010, an event that she said “took dozens of highly trained economists, financial professionals and data technologists four months to aggregate and process the information required to fully analyze just a few hours of trading on a single day.” While that process “was remarkable considering our limitations, and while we were able to identify the various causes of that event, efficient and effective market regulation requires that future analyses not take nearly that long.” SEC Commissioner Daniel Gallagher called the adoption of the rule “a sea change for the securities markets,” as it requires “the re-evaluation and revamping of key aspects of market infrastructure; it will provide the commission with data and other information that is critical to satisfying our statutory missions, and allowing us to oversee the markets in a smart and efficient manner.”

If it were not for the Dodd-Frank rulemaking frenzy that has dominated the SEC’s agenda for the last two years, Gallagher said, “it would be abundantly clear that this rulemaking is a game changer.”

FINRA released a statement after the SEC vote, saying that adoption of a consolidated audit trail through the development of a national market system (NMS) plan “is an important step that will enhance regulators’ ability to conduct surveillance of trading activity across multiple markets and perform market reconstruction and analysis.”

FINRA said it “looks forward to working with the other SROs to submit an NMS plan that will help close the regulatory data gaps that exist today,” and that it believes “comprehensive intermarket surveillance is essential to ensuring the overall integrity of the U.S. securities markets and maintaining the confidence of investors in those markets.”


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