SEC Retreats on Real-Time Monitoring

Terry Flanagan

Consolidated Audit Trail need not include real-time surveillance, agency says.

The Securities and Exchange Commission has apparently retreated on a key element of its proposed Consolidated Audit Trail, or CAT, which would have required real-time or near real-time reporting.

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.

The proposed rule would require exchanges and FINRA to provide a majority of the required order and event information to the central repository in real time or close to real time.

However, the SEC has backtracked on this point, bowing to intense industry lobbying.

“The chairman believes, based on the comments received, that very substantial benefits of a consolidated audit trail can be achieved at this point without incurring the costs and risks of real-time reporting,” John Nester, an SEC spokesman, said in a statement.

At a meeting between the SEC and Sifma’s CAT Working Group on Jan. 20, Sifma expressed serious concerns about the cost of a real-time reporting requirement.

“It remains unclear to us what tangible regulatory objectives would be served by requiring this information on a real-time basis, as opposed to an end of day or T+1 basis, like FINRA’s OATS system currently requires,” Sifma said.
Proponents of real-time monitoring disagree.

“The SEC’s inclination to back away from monitoring real-time data is confounding,” John Bates, chief technology officer at Progress Software, told Markets Media. “To spot abuse as it happens, and possibly even prevent it, regulators need to gain continuous intelligence over real time and historical data. In order to be proactive and able to respond to what is happening — and what might be about to happen – the monitoring framework has to include real-time data.”

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.

FINRA operates the Order Audit Trail System (OATS), an integrated audit trail of order, quote, and trade information for Nasdaq and OTC equity securities. FINRA uses this audit trail system to recreate events in the life cycle of orders and more completely monitor the trading practices of member firms, who are required to develop a means for electronically capturing and reporting to OATS specific data elements related to the handling or execution of orders, including recording all times of these events in hours, minutes, and seconds, and to synchronize their business clocks.

FINRA has proposed using OATS as the foundation for a CAT. However, OATS doesn’t accommodate options data and doesn’t support real-time trade data surveillance, NASDAQ OMX said in a comment letter.

NASDAQ OMX has proposed a CAT powered by a combination of NASDAQ’s FTEN and SMARTS technology with the OATS data format.

FTEN provides intraday risk management and SMARTS offers surveillance and compliance solutions.

This more advanced CAT system could be expanded to equities and options at a cost no higher than FINRA estimates for an equity-only CAT based solely on OATS, according to NASDAQ.

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