09.28.2011
By Terry Flanagan

Regulators Seek Data

SEC moving forward with consolidated audit trail.

The Securities and Exchange Commission is pushing ahead with plans for a consolidated audit trail that will enable regulators to track information related to trading orders received and executed across the securities markets.

At a recent industry conference, David Shillman, associate director of the SEC’s Division of Trading and Markets, called consolidated audit trail the agency’s “number one” priority.

“The SEC has stated a desire to rectify the fact that its ability to collect trading data is wholly inadequate to the task of overseeing the largest equity markets in the world,” Dan Hubscher, industry manager, capital markets at Progress Software, told Markets Media.

“A consolidated audit trail is a great step in the right direction but more needs to be done,” said Hubscher. “Though exhaustive in one asset class, it is still a matter of looking at what has already happened, like chasing a Ferrari with a bicycle.”

Technology is available that provides early warnings of anomalous events, providing precious time for regulators and exchanges to take action, he said.  And a real-time view can deter market manipulation and other abuses that continue to occur.

Further, given the linkages of markets across geographies and asset classes, cooperation of regulators across those boundaries to gain a bird’s eye view is required to enable true transparency into future flash crashes, cross-asset ‘splash crashes’, ‘fat finger’ trades and other errors, said Hubscher.

“To avoid not knowing about a flash-crash type event until after the end of the day, real-time surveillance is needed,” he said.

Currently, there is no single database of comprehensive and readily accessible data regarding orders and executions. Instead, each self-regulatory organization (SRO) uses its own separate audit trail systems to track information relating to orders in its respective markets.

Existing audit trail requirements vary significantly among markets, which means that regulators, when conducting a cross-market analysis, must obtain and merge together a large volume of disparate data from different entities.

The proposed rule would require every exchange and Finra to provide 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, and 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.

 

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