Hello OATS. Goodbye OTS.
The Financial Industry Regulatory Authority (FINRA) last week won approval from the Securities and Exchange Commission to extend its Order Audit Trail System (OATS) to all National Market System stocks.
Heretofore, OATS has been used by broker-dealers to report orders and trades in Nasdaq securities only. Firms used the New York Stock Exchange’s Order Tracking System (OTS) to report their orders and trades in stocks listed on NYSE Euronext exchanges.
The SEC’s decision likely means that the NYSE will scrap OTS once firms are in full compliance with OATS rules. That is expected to reduce the compliance burden on firms, many of which have complained about the redundancy of using two systems. The data required by both OTS and OATS is similar.
FINRA asked for permission to transfer OTS reporting to OATS shortly after the regulator took over the surveillance duties of NYSE Euronext in June. OTS is still owned by the NYSE, but FINRA has the right to access it.
FINRA’s market regulation group now oversees trading on all exchanges except for BATS Global Markets and Direct Edge. That equates to about 80 percent of shares traded.
Transferring OTS reporting over to OATS is part of a two-year project of integrating NYSE surveillance into FINRA. "It’s a big technology lift to bring all that data together and maintain it in a way that you can run surveillance over it," Tom Gira, in charge of FINRA market regulation, told Traders Magazine. Gira oversees 450 of FINRA’s 3,100 employees. About half come from the NYSE.
In approving FINRA’s plan, the SEC noted that the move is a "positive step toward a cross-market audit trail." In June, the SEC called on FINRA and the exchanges to create a "consolidated audit trail" that would monitor trading on all exchanges.
The SEC concluded that a central repository of order and trading data was necessary following the May 6 "flash crash." In the wake of the now infamous market flip-flop, the SEC found itself without sufficient data to analyze the event.
FINRA has petitioned the SEC to let it build the consolidated audit trail using OATS as a base. The SEC is skeptical that OATS can be "retrofitted," but the idea does have the support of the Securities Industry & Financial Markets Association.
"The SEC should strongly consider leveraging OATS," Gira said, "because it is there and firms are used to it." FINRA has argued that by using OATS as the starting point, it could build the data repository much faster than if someone were to build it from scratch.
