06.05.2012
By Terry Flanagan

Consolidated Audit Trail Sparks Debate

Regulators’ push to have all U.S. trades reported on a single tape has drawn pushback from some financial-market participants, who argue that a near-real-time comprehensive report would cost too much.

A source with knowledge of the ongoing discussions told Markets Media that regulators and the financial sector are now trying to reach the compromise of a consolidated tape that is comprehensive and timely enough to provide value for regulators, but at a reasonable cost to market participants.

The consolidated audit tape has emerged as one of the most contentious and important initiatives included in the sweeping Dodd-Frank Act, which was signed into law in 2010 and is in the process of being finalized and implemented.

In May 2010, just weeks after the so-called ‘flash crash’ in which stocks temporarily and aberrationally swooned for no apparent reason, the U.S. Securities and Exchange Commission proposed a consolidated audit trail system that would enable regulators to track orders and trades executed across securities markets.

The flash crash put the need for a consolidated tape in focus, as regulators had to compile and sift through trading information from multiple exchanges and alternative trading systems to try to understand how stocks that were trading for $30 or $40 could suddenly go to a penny.

“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,” the SEC said in May 2010. The trading-venue landscape has fragmented further in the past two years, making the need for centralized information more acute.

The SEC has conducted dozens of industry meetings regarding the proposed consolidated audit trail, and continues to solicit comments. As would be expected, comments vary widely and range from suggestions to scrap the idea to proposals to strengthen the SEC’s proposed version.

The Security Traders Association said it agrees that a consolidated tape can improve surveillance, but it suggested a longer study and review period before implementation.

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