The Securities and Exchange Commission has voted to require national securities exchanges and the Financial Institution Regulatory Authority to establish a market-wide consolidated audit trail to enhance the ability of regulators to monitor and analyze trading activity.
The new rule adopted Wednesday by the SEC 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, forcing regulators to obtain and merge large volumes of various kinds of 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 chair Mary Schapiro in a statement.
The SEC said creating a consolidated audit trail would increase the data available to regulators investigating illegal activities such as insider trading and market manipulation. It would also significantly improve the ability to reconstruct broad-based market events in an accurate and timely manner, such as the infamous “flash crash” of 2010. A consolidated audit trail also would significantly increase the ability of regulators to monitor the overall market structure and assess how SEC rules are affecting the markets. In addition, the SEC argues that it would 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 plan for creating such as system to the SEC within 270 days of the rule’s publication in the Federal Register.
Once the SEC approves the plan, self-regulatory organizations 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 their data.
