Frustration over the momentous task of implementing the National Association of Securities Dealers' Order Audit Trail System (OATS) may be unnerving both regulators and the trading community.
At press time, however, the current stumbling blocks pushing back the phase-in from August to Jan 1., 1999 under NASD prodding, and deciding the technical specifications look set to be surmounted.
"We are expecting a Securities and Exchange Commission approval [deadline] very soon," Mary Shapiro, head of NASD Regulation, told Traders Magazine in mid-February. In addition, NASD Regulation made it clear that technical specifications would be published on its OATS web page.
Bernard L. Madoff, who chairs the Securities Industry Association's OATS Ad Hoc Committee, said that SEC action by month's end was most likely imminent.
Original Deadline
Nevertheless, preparing for OATs has had industry participants hot under the collar. In particular, the original August deadline for phasing-in OATS which still officially stands, unless the SEC approves the NASD-proposed January deadline has upset many traders.
"We were hit between the eyes with deadlines for the order handling rules, and now we have OATS," said one trader, who declined to be named. "I pray that the SEC approves the new OATS timetable."
Meanwhile, a frustrated Stuart Kaswell, general counsel of the SIA, complained at a press briefing that "you cannot spec out a system without specs."
OATS is envisioned as a real-time electronic system designed to gather and report some 25 Nasdaq trade details. At the moment, Nasdaq desks electronically report certain trade information to the NASD within 90 seconds of execution.
Information
While OATS technical specifications are pending, NASD Regulation has not been slow, however, making information available on the regulatory side. According to material published by NASD Regulation, if a firm is acting strictly in the capacity of an investment adviser and not acting as a broker dealer when recovering or handling orders, there is no reporting responsibility. On the other hand, if a firm receives and/or handles orders in Nasdaq securities, it has OATS reporting responsibilities.
Moreover, if a firm has a reporting responsibility, and it has an arrangement with a clearing firm, it is possible that the clearing firm will report order information on its behalf.
However, the agreement to use another firm must be arranged by the firm with reporting responsibility and supported in written form. The firm must also provide its clearing firm with the information required to be reported.
If a firm has a reporting responsibility, the burden is on both the firm and the submitting firm to ensure that timely, accurate and complete order information is reported. It is a shared responsibility. Member firms using non-member entities are responsible for submissions made by the non-member entities. Some member firms will be required to develop a means for electronically capturing and reporting data on specific events in the life cycle of each order.
Member firms must report oral, written or electronic instructions to initiate a transaction in a Nasdaq security, including orders received from another member firm and orders received from another department within the same firm.
In addition, member firms with reporting responsibility must report the routing of orders to another member firm, another department of the same firm or an electronic communications network, and the modification, cancellation and execution of orders.
All orders must be reported to OATS, including open orders, modified orders, partially-executed orders, canceled orders and expired orders. If an order-entry firm has a reporting responsibility, it must report the new order and the execution.
Market makers must report a new order and execution only if the trade is in response to an order submitted by one of the market-maker's customers, another broker dealer or originated from another department within the firm. If the market maker initiates a transaction for its own account against another market maker, it is not required to report the execution.
Real-time reporting is not a requirement. Member firms that have reporting responsibility will be allowed to send order information to NASD Regulation in a batch file. Members may choose to send one file at the end of the day or several files throughout the day.
Software
There are no plans to provide members with software or a workstation to transmit the required data. NASD Regulation plans a series of industry forums pending SEC approval of the new deadline.
Once available, paper copies of the technical specifications can be requested from NASD Regulation's OATS Support Center at (888) 700-OATS or (301) 590-6503, or via e-mail at oatscsc@nasd.com.
