`[Federal Register Volume 75, Number 109 (Tuesday, June 8, 2010)]
[Proposed Rules]
[Pages 32556-32610]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-13129]





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Part II











Securities and Exchange Commission











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17 CFR Part 242







Consolidated Audit Trail; Proposed Rule



  Federal Register / Vol. 75 , No. 109 / Tuesday, June 8, 2010 / 

Proposed Rules  



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SECURITIES AND EXCHANGE COMMISSION



17 CFR Part 242



[Release No. 34-62174; File No. S7-11-10]

RIN 3235-AK51




Consolidated Audit Trail



AGENCY: Securities and Exchange Commission.



ACTION: Proposed rule.



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SUMMARY: The Securities and Exchange Commission (``Commission'') is 

proposing new Rule 613 under Section 11A(a)(3)(B) of the Securities 

Exchange Act of 1934 (``Exchange Act'') that would require national 

securities exchanges and national securities associations (``self-

regulatory organizations'' or ``SROs'') to act jointly in developing a 

national market system (``NMS'') plan to develop, implement, and 

maintain a consolidated order tracking system, or consolidated audit 

trail, with respect to the trading of NMS securities.

    The Commission preliminarily believes that with today's electronic, 

interconnected markets, there is a heightened need for regulators to 

have efficient access to a more robust and effective cross-market order 

and execution tracking system. Currently, many of the national 

securities exchanges and the Financial Industry Regulatory Authority, 

Inc. (``FINRA'') have audit trail rules and systems to track 

information relating to orders received and executed, or otherwise 

handled, in their respective markets. While the information gathered 

from these audit trail systems aids the SRO and Commission staff in 

their regulatory responsibility to surveil for compliance with SRO 

rules and the federal securities laws and regulations, the Commission 

preliminarily believes that existing audit trails are limited in their 

scope and effectiveness in varying ways. In addition, while the SRO and 

Commission staff also currently receive information about orders or 

trades through the electronic bluesheet (``EBS'') system, Rule 17a-25 

under the Exchange Act,\1\ or from equity cleared reports, the 

information is limited, to varying degrees, in detail and scope.

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    \1\ 17 CFR 240.17a-25.

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    A consolidated audit trail would significantly aid in SRO efforts 

to detect and deter fraudulent and manipulative acts and practices in 

the marketplace, and generally to regulate their markets and members. 

In addition, such an audit trail would benefit the Commission in its 

market analysis efforts, such as investigating and preparing market 

reconstructions and understanding causes of unusual market activity. 

Further, timely pursuit of potential violations can be important in 

seeking to freeze and recover any profits received from illegal 

activity.



DATES: Comments should be received on or before August 9, 2010.



ADDRESSES: Comments may be submitted by any of the following methods:



Electronic Comments



     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or

     Send an e-mail to [email protected]. Please include 

File No. S7-11-10 on the subject line; or

     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.



Paper Comments



     Send paper comments in triplicate to Elizabeth M. Murphy, 

Secretary, Securities and Exchange Commission, 100 F Street, NE., 

Washington, DC 20549-1090.

    All submissions should refer to File No. S7-11-10. This file number 

should be included on the subject line if e-mail is used. To help us 

process and review your comments more efficiently, please use only one 

method. The Commission will post all comments on the Commission's 

Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 

are also available for Web site viewing and printing in the 

Commission's Public Reference Room, 100 F Street, NE., Washington, DC 

20549 on official business days between the hours of 10 a.m. and 3 p.m. 

All comments received will be posted without change; we do not edit 

personal identifying information from submissions. You should submit 

only information that you wish to make available publicly.



FOR FURTHER INFORMATION CONTACT: Rebekah Liu, Special Counsel, at (202) 

551-5665; Jennifer Colihan, Special Counsel, at (202) 551-5642, or 

Leigh W. Duffy, Attorney-Adviser, at (202) 551-5928, Division of 

Trading and Markets, Securities and Exchange Commission, 100 F Street, 

NE., Washington, DC 20549-7010.



SUPPLEMENTARY INFORMATION: 



Table of Contents



I. Background

II. Basis for Proposed Rule

III. Description of Proposed Rule

IV. Request for Comments

V. Paperwork Reduction Act

VI. Consideration of Costs and Benefits

VII. Consideration of Burden on Competition, and Promotion of 

Efficiency, Competition and Capital Formation

VIII. Consideration of Impact on the Economy

IX. Initial Regulatory Flexibility Act Analysis

X. Statutory Authority



I. Background



    The U.S. securities markets have undergone a significant 

transformation over the last few decades, and particularly in the last 

few years. Regulatory changes and technological advances have 

contributed to a tremendous growth in trading volume and the further 

distribution of order flow across multiple trading centers. Today's 

markets are widely dispersed, with securities often trading on multiple 

markets, including over-the-counter (``OTC''). Additionally, products 

that are closely related in nature and objective are also traded on 

different markets. For example, various markets trade either options on 

the S&P 500 index,\2\ futures on the S&P 500 index,\3\ exchange traded 

funds (``ETFs'') based on the S&P 500 index,\4\ and options and futures 

on those ETFs.\5\ This dispersion of significant trading volume has led 

the Commission in the past to ask for comment on how best to enhance 

the capability of SROs and the Commission to effectively and 

efficiently conduct cross-market supervision of trading activity.\6\

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    \2\ The Chicago Board Options Exchange, Incorporated (``CBOE'') 

lists options on the S&P 500 Index (SPX) and on the Mini-S&P 500 

Index (XSP) (1/10th the value of the S&P 500 Index).

    \3\ For example, the Chicago Mercantile Exchange Inc. (``CME'') 

offers S&P 500 futures and ``E-Mini'' futures on the S&P 500 Index 

($50 x S&P 500 Index price).

    \4\ For example, NYSE Arca, Inc. (``NYSE Arca'') lists an ETF 

based on the S&P 500 SPDR (SPY) and the iShares S&P 500 Index Fund 

(IVV).

    \5\ For example, OneChicago, LLC lists futures on the SPY, and 

CBOE lists options on the iShares S&P 500 Value Index Fund.

    \6\ See infra Section I.G. (discussing past Commission requests 

for comment on regulation of intermarket trading).

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    The individual SROs are responsible for regulating their markets 

and their members.\7\ Further, the Commission has responsibilities to 

oversee the SROs, the securities markets, and registered broker-

dealers, and routinely conducts examinations of or investigations into 

trading activity as part of its oversight and enforcement programs.\8\ 

The SROs and the Commission need tools to



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effectively carry out these responsibilities even when trading occurs 

on multiple markets. For example, it is important that the SRO and 

Commission staff have order and trade data sufficient to monitor cross-

market trading activity, assist with investigations of potential 

violations of federal securities laws and exchange rules, and perform 

market reconstructions or other analysis necessary to understand 

trading activity.\9\ Such information also is important to the 

Commission in carrying out its oversight responsibilities.

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    \7\ See, e.g., Sections 6(b)(1), 15A(b)(2), and 19(g) of the 

Exchange Act, 15 U.S.C. 78f(b)(1), 15 U.S.C. 78o-3(b)(2), and 15 

U.S.C. 78s(g).

    \8\ See, e.g., Sections 2, 6(b)(1), 10, 15(b)(4)(D) and (E), and 

19(h) of the Exchange Act, 15 U.S.C. 78b, 15 U.S.C. 78f(b)(1), 15 

U.S.C. 78j, 15 U.S.C. 78o(b)(4)(D) and (E), and 15 U.S.C. 78s(h).

    \9\ As discussed below in Sections II and III, the Commission 

preliminarily believes that the proposal would improve the ability 

of regulators to conduct timely and accurate trading analyses for 

market reconstructions and complex investigations, as well as 

inspections and examinations. Indeed, the Commission believes that 

the proposed consolidated audit trail, if implemented, would have 

significantly enhanced the Commission's ability to quickly 

reconstruct and analyze the severe market disruption that occurred 

on May 6, 2010. If approved and implemented, the proposal also would 

enhance the Commission's ability to similarly respond to future 

severe market events.

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    The SROs' staff currently uses both EBS \10\ and SRO audit trail 

data to help fulfill their regulatory obligations.\11\ Commission staff 

also uses this data to perform its regulatory oversight obligations. 

The Commission and SROs have depended on the bluesheet system for 

decades to request trading records from broker-dealers needed for 

regulatory inquiries. Most SROs also maintain their own specific audit 

trail requirements applicable to their members. As discussed more fully 

below, for example, the National Association of Securities Dealers 

(``NASD'') \12\ established the Order Audit Trail System (``OATS'') 

\13\ in 1996, and the New York Stock Exchange (``NYSE'') implemented 

its Order Tracking System (``OTS'') \14\ in 1999. Beginning in 2000, 

several of the current options exchanges implemented the Consolidated 

Options Audit Trail System (``COATS'').\15\

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    \10\ Bluesheets are trading records requested by the Commission 

and SROs from broker-dealers that are used in regulatory 

investigations to identify buyers and sellers of specific 

securities.

    \11\ The Commission recently published for comment a proposal to 

establish a large trader reporting system. See Securities Exchange 

Act Release No. 61908 (April 14, 2010), 75 FR 21456 (April 23, 2010) 

(``Large Trader Proposal''). Under that proposal, large traders 

would be issued unique identifiers that they would be required to 

provide to the broker-dealers that execute transactions on their 

behalf, and the broker-dealers would be required to maintain, and 

provide to the Commission upon request, transaction records for each 

large trader customer. The large trader proposal is designed to 

address in the near term the Commission's current need for access to 

more information about large traders and their activities. As 

discussed below, the Commission anticipates that the proposed 

consolidated audit trail discussed in this release, which is much 

broader in scope, would take a significant amount of time to fully 

implement. This proposal would require that, if the Large Trader 

proposal is adopted, the large trader identification number be 

reported to the central repository as part of the identifying 

customer information. See proposed Rule 613(j)(2).

    \12\ In 2007, the NASD and the member-related functions of NYSE 

Regulation, Inc., the regulatory subsidiary of the New York Stock 

Exchange LLC (``NYSE''), were consolidated. As part of this 

regulatory consolidation, the NASD changed its name to FINRA. See 

Securities Exchange Act Release No. 56146 (July 26, 2007), 72 FR 

42190 (August 1, 2007). FINRA and the National Futures Association 

(``NFA'') are currently the only national securities associations 

registered with the Commission; however, the NFA has a limited 

purpose registration with the Commission under Section 15A(k) of the 

Exchange Act, 15 U.S.C. 78o-3(k). See also Securities Exchange Act 

Release No. 44823 (September 20, 2001), 66 FR 49439 (September 27, 

2001).

    \13\ See Securities Exchange Act Release No. 39729 (March 6, 

1998), 63 FR 12559 (March 13, 1998) (order approving proposed rules 

comprising OATS) (``OATS Approval Order'').

    \14\ See Securities Exchange Act Release No. 47689 (April 17, 

2003), 68 FR 20200 (April 24, 2003) (order approving proposed rule 

change by NYSE relating to order tracking) (``OTS Approval Order'').

    \15\ See In the Matter of Certain Activities of Options 

Exchanges, Administrative Proceeding File No. 3-10282, Securities 

Exchange Act Release No. 43268 (September 11, 2000) (Order 

Instituting Public Administrative Proceedings Pursuant to Section 

19(h)(1) of the Securities Exchange Act of 1934, Making Findings and 

Imposing Remedial Sanctions) (``Options Settlement Order''). See 

also, e.g., Securities Exchange Act Release No. 50996 (January 7, 

2005), 70 FR 2436 (order approving proposed rule change by CBOE 

relating to Phase V of COATS).

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    Currently, there is significant disparity in the audit trail 

requirements among the exchanges and FINRA, especially with respect to 

the information captured by each.\16\ Further, the information for each 

must be provided in different formats. The differences result in 

inconsistent requirements imposed on exchange and FINRA members, and 

also make it difficult to view trading activity across multiple 

markets. The lack of uniformity in, and cross-market compatibility of, 

SRO audit trails can make detection of illegal trading activity carried 

out across multiple markets and multiple products more difficult. The 

Commission has voiced concern about the lack of uniformity in, and 

cross-market compatibility of, the audit trails in the past.\17\ The 

Commission preliminarily believes that these differences may hinder the 

ability of the SROs and the Commission to effectively view and regulate 

trading activity across markets.

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    \16\ See infra Sections I.C, I.D, I.E, and I.F.

    \17\ See infra Section I.G.

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    Further, risks imposed on the markets by violative conduct can be 

substantially increased by automated trading, as market participants 

have the ability to trade numerous products and enormous volume in mere 

seconds. As trading venues have become more automated, and trading 

systems have become computerized, trading volumes have increased 

significantly,\18\ and trading has become more dispersed across more 

trading centers and therefore more difficult to monitor and trace.\19\ 

The Commission is concerned that current audit trail requirements are 

insufficient to capture in a timely manner all of the information 

necessary to efficiently and effectively monitor trading activity in 

today's highly automated and dispersed markets. The Commission also is 

concerned that the current lack of cohesive, readily available order 

and execution information impacts the ability of the SROs and the 

Commission staff to effectively perform their respective regulatory and 

oversight responsibilities with respect to trading activity by market 

participants across markets and products.

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    \18\ For example, consolidated average daily share volume and 

trades in NYSE-listed stocks increased from just 2.1 billion shares 

and 2.9 million trades in January 2005, to 5.9 billion shares (an 

increase of 181%) and 22.1 million trades (an increase of 662%) in 

September 2009. See Large Trader Proposal, supra note 11, at 21456.

    \19\ See, e.g., Securities Exchange Act Release No. 61358 

(January 14, 2010), 75 FR 3594 (January 21, 2010) (``Concept Release 

on Equity Market Structure'') at 3594-3596.

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A. Electronic Bluesheets and Rule 17a-25



    The Commission and the SROs frequently request bluesheets from 

broker-dealers to aid in investigations of possible Federal securities 

law violations and to create market reconstructions.\20\ Until the late 

1980s, bluesheets consisted of questionnaire forms that Commission and 

SRO regulatory staff mailed to firms to be manually completed and 

returned.\21\ Obtaining bluesheets in this manner was particularly 

onerous as there were substantial delays in the production and receipt 

of the requested information. Additionally, the data was submitted in a 

variety of formats, making analysis time-consuming, and requests could 

result in vast amounts of information requiring lengthy manual 

examination.\22\

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    \20\ See Securities Exchange Act Release No. 44494 (June 29, 

2001), 66 FR 35836 (July 9, 2001) (File No. S7-12-00) (``Rule 17a-25 

Adopting Release''), at 35836.

    \21\ Id.

    \22\ See Securities Exchange Act Release No. 25859 (June 27, 

1988), 53 FR 25029 (July 1, 1988) (approving both the NYSE and the 

American Stock Exchange's (``Amex'') rules for the electronic 

submission of transaction information).

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    In the late 1980s, as the volume of trading and securities 

transactions



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dramatically increased, the manual bluesheet system was replaced by the 

EBS system.\23\ The EBS system allows broker-dealers to electronically 

submit the requested information in a specific format and transmit it 

to the Securities Industry Automation Corporation (``SIAC'').\24\ SIAC 

then routes the information to the Commission or to an SRO as 

applicable.

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    \23\ See Rule 17a-25 Adopting Release, supra note 20, at 3-4. 

See also, e.g., id. and Securities Exchange Act Release Nos. 26235 

(November 1, 1988), 53 FR 44688 (November 4, 1988) (approving the 

CBOE rule for the electronic submission of transaction information); 

26539 (February 13, 1989), 54 FR 7318 (February 17, 1989) (approving 

the NASD's rule for the electronic submission of transaction 

information); and 27170 (August 23, 1989), 54 FR 37066 (September 6, 

1989) (approving the Philadelphia Stock Exchange's rule for the 

electronic submission of transaction information).

    \24\ See Rule 17a-25 Adopting Release, supra note 20, at 35836. 

SIAC is a subsidiary of NYSE Euronext and serves as the securities 

information processor of the Consolidated Tape Plan (``CTA Plan''), 

which governs the dissemination of trade information; the 

Consolidated Quotation Plan (``CQ Plan''), which governs the 

dissemination of quotation information; and the Options Price 

Reporting Authority Plan (``OPRA Plan''), which governs the 

dissemination of trade and quotation information for listed options. 

In this capacity, it provides real time quotation and transaction 

information to market participants.

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    The EBS system, supplemented by the requirements of Rule 17a-25 

under the Exchange Act,\25\ currently is used by Commission and SRO 

regulatory staff primarily to assist the staff in the investigation of 

possible federal securities law violations primarily involving insider 

trading and other market manipulations, and to conduct market 

reconstructions, especially following periods of significant market 

volatility.\26\ In its electronic format, the EBS system provides 

detailed execution information upon request by the Commission and the 

SROs' staff for specific securities during specified time frames.\27\ 

However, because the EBS system is designed for use in narrowly-focused 

enforcement investigations that generally involve trading in particular 

securities, it is less useful for large-scale market reconstructions 

and analyses involving numerous stocks during peak trading volume 

periods.\28\

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    \25\ 17 CFR 240.17a-25.

    \26\ See Rule 17a-25 Adopting Release, supra note 20, at 35836.

    \27\ EBS data does not, however, include the time of execution, 

and often does not include the identity of the beneficial owner. See 

infra note 147.

    \28\ A 1990 Senate Report acknowledged the immense value of the 

EBS system, but noted that ``it is designed for use in more narrowly 

focused enforcement investigations that generally relate to trading 

in individual securities. It is not designed for use for multiple 

inquiries that are essential for trading reconstruction purposes.'' 

See S. Rep. No. 300, 101st Cong., 2d Sess. 2-5 (1990), at 48.

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    In 2000, the Commission proposed Rule 17a-25 under the Exchange Act 

to supplement the existing EBS system with data elements incorporating 

institutional and professional trading strategies, to assist regulatory 

staff in reviewing and analyzing EBS data.\29\ Adopted in June 

2001,\30\ the rule codified the requirement that broker-dealers submit 

to the Commission, upon request, information on their customer and 

proprietary securities transactions in an electronic format.\31\ Rule 

17a-25 requires submission of the same standard customer and 

proprietary transaction information that SROs request through the EBS 

system in connection with their market surveillance and enforcement 

inquiries.\32\

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    \29\ See Securities Exchange Act Release No. 42741 (May 2, 

2000), 65 FR 26534 (May 8, 2000) (``Rule 17a-25 Proposing 

Release'').

    \30\ See Rule 17a-25 Adopting Release, supra note 20.

    \31\ Id. at 35836, and 17 CFR 240.17a-25.

    \32\ See e.g. NYSE Rule 410A and FINRA Rule 8211.

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    Specifically, for a proprietary transaction, Rule 17a-25 requires a 

broker-dealer to provide the following information electronically upon 

request: (1) Clearing house number or alpha symbol used by the broker-

dealer submitting the information; (2) clearing house number(s) or 

alpha symbol(s) of the broker-dealer(s) on the opposite side to the 

trade; (3) security identifier; (4) execution date; (5) quantity 

executed; (6) transaction price; (7) account number; (8) identity of 

the exchange or market where the transaction was executed; (9) prime 

broker identifier; (10) average price account identifier; and (11) the 

identifier assigned to the account by a depository institution.\33\ For 

customer transactions, the broker-dealer also is required to include 

the customer's name, customer's address, the customer's tax 

identification number, and other related account information.\34\ The 

new data elements added by Rule 17a-25--prime broker identifiers, 

average price account identifiers, and depository institution account 

identifiers--assist the Commission in aggregating, without double-

counting, securities transactions by entities trading through multiple 

accounts at more than one broker-dealer.\35\

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    \33\ See Rule 17a-25(a)(1) and Rule 17a-25(b)(1)-(3), 17 CFR 

240.17a-25(a)(1) and 17 CFR 240.17a-25(b)(1)-(3).

    \34\ See Rule 17a-25(a)(2), 17 CFR 240.17a-25(a)(2). Rule 17a-25 

also requires broker-dealers to submit, and keep current, contact 

person information for requests under the rule. This provision was 

designed to ensure that the Commission could effectively direct its 

data requests to broker-dealers. See Rule 17a-25 Proposing Release, 

supra note 29, at 26537.

    \35\ This information was deemed especially necessary for the 

creation of massive market reconstructions performed by Commission 

staff. See Rule 17a-25 Adopting Release, supra note 20, at 35836.

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B. Equity Cleared Reports



    In addition to the EBS system and Rule 17a-25, the Commission also 

relies upon the National Securities Clearing Corporation's (``NSCC'') 

\36\ equity cleared report for initial regulatory inquiries.\37\ This 

report is generated on a daily basis by the SROs and is provided to the 

NSCC, in a database accessible by the Commission, and shows the number 

of trades and daily volume of all equity securities in which 

transactions took place, sorted by clearing member. The information 

provided is end of day data and is searchable by security name and 

CUSIP number.\38\ Since the information made available on the report is 

limited to the date, the clearing firm, and the number of transactions 

cleared by each clearing firm on each SRO, it basically serves as a 

starting point for an investigation, providing a tool the Commission 

can use to narrow down which clearing firms to contact concerning a 

transaction in a certain security.

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    \36\ NSCC is a subsidiary of the Deposit Trust and Clearing 

Corporation and provides centralized clearing information and 

settlement services to broker-dealers for trades involving equities, 

corporate and municipal debt, American depository receipts, exchange 

traded funds, and unit investment trusts.

    \37\ The Commission also uses the Options Cleared Report, with 

data supplied by the Options Clearing Corporation (``OCC''), for 

analysis of trading in listed options. OCC is an equity derivatives 

clearing organization that is registered as a clearing agency under 

Section 17A of the Exchange Act and operates under the jurisdiction 

of both the Commission and the Commodities Futures Trading 

Commission (``CFTC'').

    \38\ A CUSIP number is a unique alphanumeric identifier assigned 

to a security and is used to facilitate the clearance and settlement 

of trades in the security.

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C. FINRA's Order Audit Trail System



    In 1996, the Commission instituted public administrative 

proceedings against the NASD, alleging that it failed to enforce and 

investigate potential misconduct by its members.\39\ In settling the 

Commission's enforcement action, the NASD was ordered to design and 

implement an audit trail to enable it to reconstruct its markets 

promptly and effectively surveil them.\40\ The Commission mandated that 

the audit trail at a minimum: (1) Provide an accurate time-sequenced 

record of orders and transactions, beginning with



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the receipt of an order at the first point of contact between the 

broker-dealer and the customer or counterparty, and further documenting 

the life of the order through the process including execution, 

modification and cancellation; and (2) provide for market-wide 

synchronization of clocks used in connection with the new audit trail 

system.\41\ In response to the order, the NASD created OATS.\42\

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    \39\ See In the Matter of National Association of Securities 

Dealers, Inc., Administrative Proceeding File No. 3-9056, Securities 

Exchange Act Release No. 37538 (August 8, 1996) (Order Instituting 

Public Proceedings Pursuant to Section 19(h)(1) of the Securities 

Exchange Act of 1934, Making Findings and Imposing Remedial 

Sanctions).

    \40\ Id. at 11-12.

    \41\ Id.

    \42\ See FINRA Rules 7400 to 7470. See also OATS Approval Order, 

supra note 13.

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    Currently, OATS is used to capture order information reported by 

FINRA members in equity securities listed on the Nasdaq Stock Market, 

Inc. (``Nasdaq'') and OTC equity securities.\43\ OATS requires 

reporting members \44\ to record and report to FINRA \45\ detailed 

information covering the receipt and origination of an order,\46\ order 

terms, transmission, and modification, cancellation and execution.\47\ 

Specifically, for each of these stages in the life of an order, FINRA 

Rule 7440 requires the recording and reporting of the following 

information, as applicable, including but not limited to:

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    \43\ FINRA defines an OTC equity security as any equity security 

that (1) is not listed on a national securities exchange, or (2) is 

listed on one or more regional stock exchanges and does not qualify 

for dissemination of transaction reports via the facilities of the 

Consolidated Tape. See FINRA Rule 7410(l).

    \44\ A reporting member is a member that receives or originates 

an order and has an obligation to record and report information 

under FINRA Rules 7440 and 7450. A member shall not be considered a 

reporting member in connection with an order if the following 

conditions are met: (1) The member engages in a non-discretionary 

order routing process, pursuant to which it immediately routes, by 

electronic or other means, all of its orders to a single reporting 

member; (2) the member does not direct and does not maintain control 

over subsequent routing or execution by the receiving reporting 

member; (3) the receiving reporting member records and reports all 

information required under FINRA Rules 7440 and 7450 with respect to 

the order; and (4) the member has a written agreement with the 

receiving reporting member specifying the respective functions and 

responsibilities of each party to effect full compliance with the 

requirements of Rule 7440 and 7450. See FINRA Rule 7410(o).

    \45\ Each reporting member must record each item of information 

required by OATS in electronic form by the end of each business day. 

See FINRA Rule 7440(a)(3). Reporting members must transmit to OATS a 

report of order information whenever an order is originated, 

received, transmitted to another department within the member or to 

another member, modified, canceled, or executed. Each report shall 

be transmitted on the day such event occurred if the information is 

available that day. Order information reports may be aggregated into 

one or more transmissions. See FINRA Rule 7450(b)(2).

    \46\ OATS recording and reporting requirements apply to any 

oral, written, or electronic instruction to effect a transaction in 

an equity security listed on the Nasdaq Stock Market or an OTC 

equity security that is received by a member from another person for 

handling or execution, or that is originated by a department of a 

member for execution by the same or another member, other than any 

such instruction to effect a proprietary transaction originated by a 

trading desk in the ordinary course of a member's market making 

activities. See FINRA Rule 7410(j).

    \47\ See FINRA Rules 7440 and 7450.

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     For the receipt or origination of the order,\48\ the date 

and time the order was first originated or received by the reporting 

member; a unique order identifier; the market participant symbol of the 

receiving reporting member; and the material terms of the order;\49\

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    \48\ FINRA Rule 7440 also requires reporting of the account 

type; the identification of the department or terminal where an 

order is received from a customer; the identification of the 

department or terminal where an order is originated by a reporting 

member; and the identification of a reporting agent if the agent has 

agreed to take on the responsibilities of a reporting member under 

Rule 7450. See FINRA Rule 7440(b).

    \49\ The specific information required to be reported includes: 

The number of shares; designation as a buy or sell or short sale; 

designation of the order as market, limit, stop, or stop limit; 

limit or stop price; date on which the order expires and if the time 

in force is less than one day, the time when the order expires; the 

time limit during which the order is in force; any request by a 

customer that an order not be displayed, or that a block size be 

displayed, pursuant to Rule 604(b) of Regulation NMS; any special 

handling requests; and identification of the order as related to a 

program trade or index arbitrage trade. See FINRA Rule 7440(b).

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     For the internal or external routing of an order, the 

unique order identifier; the market participant symbol of the member to 

which the order was transmitted; the identification and nature of the 

department to which the order was transmitted if transmitted 

internally; the date and time the order was received by the market 

participant or department to which the order was transmitted; the 

material terms of the order as transmitted; \50\ the date and time the 

order is transmitted; and the market participant symbol of the member 

who transmitted the order;

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    \50\ The specific information required includes the number of 

shares to which the transmission applies, and whether the order is 

an intermarket sweep order. See FINRA Rule 7440(c).

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     For the modification or cancellation of an order, a new 

unique order identifier; original unique order identifier; the date and 

time a modification or cancellation was originated or received; and the 

date and time the order was first received or originated; \51\ and

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    \51\ For cancellations or modification, the following 

information also is required: If the open balance of an order is 

canceled after a partial execution, the number of shares canceled; 

and whether the order was canceled on the instruction of a customer 

or the reporting member. See FINRA Rule 7440(d).

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     For the execution of an order, in whole or in part, the 

unique order identifier; the designation of the order as fully or 

partially executed; the number of shares to which a partial execution 

applies and the number of unexecuted shares remaining; the date and 

time of execution; the execution price; the capacity in which the 

member executed the transaction; the identification of the market where 

the trade was reported; and the date and time the order was originally 

received.\52\

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    \52\ For executions, the reporting member also must report its 

market participant symbol; its number assigned for purposes of 

identifying transaction data; and the identification number of the 

terminal where the order was executed. See FINRA Rule 7440(d).

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FINRA uses this information to recreate daily market activity for 

FINRA's market surveillance activities.\53\

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    \53\ See OATS Reporting Technical Specifications, January 5, 

2010, available at http://www.finra.org/web/groups/industry/@ip/@comp/@regis/documents/appsupportdocs/p120686.pdf.

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D. NYSE's Order Tracking System



    The Commission instituted public administrative proceedings against 

the NYSE in 1999, alleging that the exchange had failed to detect 

violations of federal securities laws and its own rules by its 

independent floor broker members, failed to police for performance-

based compensation arrangements involving these members, and failed to 

adequately surveil them.\54\ In settling the Commission's enforcement 

action, the NYSE was ordered to continue its development of an 

electronic floor system for the entry of order details prior to 

representation on the exchange floor, as well as to design and 

implement an audit trail to enable it to effectively surveil and 

reconstruct its market promptly, and facilitate the NYSE's effective 

enforcement of the federal securities laws and exchange rules.\55\ Like 

OATS, this audit trail was required to provide an accurate, time-

sequenced record of orders, quotations and transactions, documenting 

the life of an order from receipt through execution or cancellation. 

The NYSE also was required to provide for synchronization of all clocks 

used in connection with the audit trail.\56\

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    \54\ See In the Matter of New York Stock Exchange, Inc., 

Administrative Proceeding File No. 3-9925, Securities Exchange Act 

Release No. 41574 (June 29, 1999) (Order Instituting Public 

Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange 

Act of 1934, Making Findings and Ordering Compliance with 

Undertakings), at 4-5.

    \55\ Id. at 28-29.

    \56\ Id.

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    In response to the Commission's order, the NYSE created OTS.\57\ 

OTS currently is used for the provision of audit trail data for orders 

\58\ in NYSE



[[Page 32560]]



and NYSE Amex-listed cash equity securities by NYSE and NYSE Amex 

members, including for orders in NYSE or NYSE Amex-listed cash equity 

securities initiated by a NYSE or NYSE Amex member or routed by a NYSE 

or NYSE Amex member to another market center for execution.\59\ OTS is 

similar in scope to OATS, as detailed information is required to be 

recorded for the stages of an order's life, from origination and 

receipt and transmittal, through order modification, cancellation, and/

or execution.\60\ Specifically, for each of these stages in the life of 

an order, OTS requires the recording of the following information, as 

applicable, including but not limited to:

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    \57\ See NYSE Rule 132B, and OTS Approval Order, supra note 14.

    \58\ OTS is applicable to all orders in NYSE-listed securities, 

regardless of account type (firm or customer). See NYSE Rule 

132B(a)(1).

    \59\ See Securities Exchange Act Release No. 59022 (November 26, 

2008), 73 FR 73683 (December 3, 2008). NYSE Alternext adopted NYSE 

Rules 1-1004 as the NYSE Alternext Equities Rules to govern all cash 

equities trading on the NYSE Alternext Trading Systems and NYSE 

Alternext Bonds. In March 2009, NYSE Alternext changed its name to 

NYSE Amex LLC (``NYSE Amex'') (the successor to Amex, see infra note 

73). See Securities Exchange Act Release No. 59575 (March 13, 2009), 

74 FR 11803 (March 19, 2009).

    \60\ See NYSE Rule 132B and NYSE Amex Equities Rule 132B. Each 

member or member organization shall, by the end of each business 

day, record each item of information required to be recorded under 

the rule in such electronic form as is prescribed by the NYSE (or 

NYSE Amex) from time to time. See NYSE Rule 132B(a)(3) and NYSE Amex 

Equities Rule 132B(a)(3). Members and member organizations shall be 

required to transmit to the NYSE or NYSE Amex, in such format as the 

applicable exchange may from time to time prescribe, such order 

tracking information as the exchange may request. See NYSE Rule 132C 

and NYSE Amex Equities Rule 132C.

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     For order receipt or origination,\61\ the date and time 

the order is originated or received by a member or member organization; 

a unique order identifier; market participant symbol; and the material 

terms of the order; \62\

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    \61\ Members are also required to report: The identification of 

the department or terminal where an order is received directly from 

a customer; and where the order is originated by a member or member 

organization, the identification of the department (if appropriate) 

of the member that originated the order. See NYSE Rule 132B(b) and 

NYSE Amex Equities Rule 132B(b).

    \62\ The specific information required to be reported includes: 

Number of shares; designation of the order as a buy or sell; 

designation of the order as a short sale; designation of the order 

as a market order, limit order, auction market order, stop order, 

auction stop order, or ISO; security symbol; limit or stop price; 

type of account; the date on which the order expires, and, if the 

time in force is less than one day, the time when the order expires; 

the time limit during which the order is in force; any request by a 

customer that an order not be displayed pursuant to Rule 604(c) 

under the Exchange Act; and special handling requests. See NYSE Rule 

132B(b) and NYSE Amex Equities Rule 132B(b).

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     For the internal or external routing of an order, the 

unique order identifier; the identification of the department to which 

an order was transmitted if transmitted internally; the date and time 

the order was received by the department receiving a transmitted order; 

the market participant symbol assigned to the member or member 

organization receiving the transmitted order or notation that the order 

was transmitted to a non-member; \63\ the material terms of the order 

as transmitted; \64\ and the date and time the order is transmitted; 

and

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    \63\ The information required to be reported also includes 

whether the order was transmitted and received manually or 

electronically; the date the order was first originated or received 

by the transmitting member or member organization; and, for each 

order to be included in a bunched order, the bunched order route 

indicator assigned to the bunched order. See NYSE Rule 132B(c) and 

NYSE Amex Equities Rule 132B(c).

    \64\ The information required to be reported includes the number 

of shares to which the transmission applies. See NYSE Rule 132B(c) 

and NYSE Amex Equities Rule 132B(c).

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     For the modification or cancellation of an order, a new 

unique order identifier; the original unique order identifier; and the 

date and time a modification or cancellation was originated or 

received.\65\

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    \65\ For cancellations or modifications, the following 

information also is required: The order identifier assigned to the 

order prior to modification; if the open balance of an order is 

canceled after a partial execution, the number of shares canceled; 

and whether the order was canceled on the instruction of a customer 

or the member or member organization. See NYSE Rule 132B(d) and NYSE 

Amex Equities Rule 132B(d).

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    Additionally, the NYSE and NYSE Amex require the recording of 

detailed information concerning the receipt, cancellation or execution 

of orders in NYSE and NYSE Amex-listed cash equity securities 

originated on or transmitted to the exchange floor.\66\ Immediately 

following receipt of an order on the floor, the member receiving the 

order must record the following information: (1) The material terms of 

the order; \67\ (2) a unique order identifier; (3) the clearing member 

organization and the identification of the member or member 

organization recording order details; \68\ and (4) modification of 

terms of the order or cancellation of the order.\69\

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    \66\ See NYSE Rule 123 and NYSE Amex Equities Rule 123, each of 

which require, among other things, a record of the cancellation of 

an order, which must include the time the cancellation was entered, 

and a record of the receipt of an execution report, which must 

include the time of receipt of the report.

    \67\ The specific information required includes the security 

symbol; quantity; side of the market; whether the order is a market, 

auction market, limit, stop, or auction limit order; any limit or 

stop price, discretionary price range, discretionary volume range, 

discretionary quote price, pegging ceiling price, pegging floor 

price and/or whether discretionary instructions are active in 

connection with interest displayed by other market centers; time in 

force; designation as held or not held; and any special conditions. 

See NYSE Rule 123(e) and NYSE Amex Equities Rule 123(e).

    \68\ The required information also includes the system-generated 

time of recording order details. See NYSE Rule 123(e) and NYSE Amex 

Equities Rule 123(e).

    \69\ See NYSE Rule 123(e) and NYSE Amex Equities Rule 123(e).

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    Further, once an order is executed, the following information must 

be recorded: (1) The material terms of the execution; \70\ (2) the 

unique order identifier; (3) the identity of the firms involved in the 

execution; \71\ and (4) certain other information related to the 

execution.\72\

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    \70\ The specific information required includes security symbol; 

quantity; transaction price; and execution time. See NYSE Rule 

123(f) and NYSE Amex Equities Rule 123(f).

    \71\ The specific information required includes the executing 

broker badge number or alpha symbol; the contra side executing 

broker badge number or alpha symbol; the clearing firm number or 

alpha; and the contra side clearing firm number or alpha. See NYSE 

Rule 123(f) and NYSE Amex Equities Rule 123(f).

    \72\ The required information includes whether the account for 

which the order was executed was that of a member or member 

organization or non-member or non-member organization; the 

identification of member or member organization which recorded order 

details; the date the order was entered into an exchange system; an 

indication as to whether this is a modification to a previously 

submitted report; settlement instructions; special trade indication 

(if applicable); and the Online Comparison System control number. 

See NYSE Rule 123(f) and NYSE Amex Equities Rule 123(f).

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E. Consolidated Options Audit Trail System



    In September 2000, the Commission instituted public administrative 

proceedings against Amex,\73\ CBOE, the Pacific Exchange,\74\ and the 

Philadelphia Stock Exchange \75\ for failing to uphold their 

obligations to enforce compliance with exchange rules and the federal 

securities laws, including those relating to reporting. Specifically, 

the Commission alleged that they had either conducted no



[[Page 32561]]



automated surveillance, or inadequate automated surveillance, of trade 

reporting and consequently failed to adequately detect noncompliance 

with their rules.\76\ In settling the Commission's enforcement action, 

the exchanges were required to jointly design and implement COATS to 

enable them to reconstruct markets promptly, surveil them, and enforce 

compliance with trade reporting, firm quote, order handling, and other 

rules.\77\ The exchanges were required to complete this undertaking in 

five phases.\78\

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    \73\ Amex was acquired by NYSE Euronext on October 1, 2008. 

Initially, the successor entity to Amex was established as NYSE 

Alternext U.S. LLC, but the name was changed in 2009 to NYSE Amex. 

See Securities Exchange Act Release No. 59575 (March 13, 2009), 74 

FR 11803 (March 19, 2009).

    \74\ In 2001, the Archipelago Exchange LLC (``ArcaEx'') was 

established as an electronic trading facility for Pacific Exchange's 

subsidiary PCX Equities, Inc. (``PCX Equities''). See Securities 

Exchange Act Release No. 44983 (October 25, 2001), 66 FR 55225 

(November 1, 2001). In 2005, Archipelago Holdings, Inc., the parent 

company of ArcaEx, acquired PCX Holdings, Inc., which included 

subsidiaries Pacific Exchange (PCX) and PCX Equities. See Securities 

Exchange Act Release No. 52497 (September 22, 2005), 70 FR 56949 

(September 29, 2005). The NYSE merged with Archipelago Holdings in 

2006. See Securities Exchange Act Release No. 53382 (February 27, 

2006), 71 FR 11251 (March 6, 2006). NYSE Arca is the successor to 

PCX.

    \75\ The Philadelphia Stock Exchange was acquired by The NASDAQ 

OMX Group, Inc. in 2008, and is now called NASDAQ OMX Phlx 

(``Phlx''). See Securities Exchange Act Release No. 58179 (July 17, 

2008), 73 FR 42874 (July 23, 2008).

    \76\ See Options Settlement Order, supra note 15, at 12.

    \77\ Id. at 22.

    \78\ Id. at 22-25.

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    In particular, each exchange was required to achieve the following 

through its audit trail: (1) Synchronize trading and support system 

clocks with all other options exchanges; (2) design and implement a 

method to merge all options exchanges' reported and matched transaction 

data on a daily basis in a common computer format; (3) incorporate its 

quotations and the national best bid and offer as displayed in its 

market with the merged transaction data so that it could be promptly 

retrieved and merged in the common computer format with other options 

exchanges' merged transactions and quotation data; (4) design and 

implement an audit trail readily retrievable (in the common computer 

format) providing an accurate, time-sequenced record of electronic 

orders, quotations and transactions on such exchange, beginning with 

the receipt of an electronic order, and further documenting the life of 

the order through the process of execution, partial execution, or 

cancellation; (5) incorporate into the audit trail all non-electronic 

orders so that such orders were also subject to the audit trail 

requirements for electronic orders; and (6) design effective 

surveillance systems to use this newly available data to enforce the 

Federal securities laws and the exchange's rules.\79\

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    \79\ See Options Settlement Order, supra note 15, at 22-25.

---------------------------------------------------------------------------



    The exchanges subject to the Options Settlement Order fully 

implemented the requirements in 2005. In addition, the International 

Securities Exchange, LLC (``ISE''), Boston Options Exchange Group, LLC 

(``BOX''), the Nasdaq Options Market (``NOM''), and BATS Options 

Exchange Market (``BATS Options'') also comply with the COATS 

requirements.\80\

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    \80\ See Securities Exchange Act Release Nos. 61154 (December 

11, 2009), 74 FR 67278 (December 18, 2009), at 67280 (stating ``ISE 

and the other options exchanges are required to populate a 

consolidated options audit trail (``COATS'') system in order to 

surveil member activities across markets''); 61388 (January 20, 

2010), 75 FR 4431 (January 27, 2010), at 4433 (Nasdaq OMX BX filing 

amending BOX's fee schedule, with similar language as Release No. 

61154); and 61419 (January 26, 2010), 75 FR 5157 (February 1, 2010) 

(BATS Exchange, Inc. (``BATS'') represented that BATS Options would 

comply with the specifications of COATS in submitting data to create 

a consolidated audit trail, as well as receiving COATS data for its 

own surveillance purposes).

---------------------------------------------------------------------------



    A majority of options exchanges require their members to provide 

the following information with respect to orders entered onto their 

exchange: (1) The material terms of the order; \81\ (2) order receipt 

time; \82\ (3) account type; (4) the time a modification is received; 

(5) the time a cancellation is received; (6) execution time; and (7) 

the clearing member identifier of the parties to the transaction.\83\

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    \81\ The specific information required includes option symbol; 

underlying security; expiration month; exercise price; contract 

volume; call/put; buy/sell; opening/closing transaction; price or 

price limit; and special instructions.

    \82\ The required information also includes identification of 

the terminal or individual completing the order ticket.

    \83\ See e.g. BATS Rule 20.7; BOX Chapter V, Section 15; CBOE 

Chapter VI, Rules 6.24 and 6.51; NOM Rule Chapter V, Section 7; NYSE 

Amex Rules 153, Commentary .01, and 962; NYSE Arca Rules 6.67, 6.68, 

and 6.69; and Phlx Rules 1063 and 1080.

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F. Other Audit Trail Requirements



    SRO audit trail rules regarding information on orders for NMS 

stocks to be recorded by their members, and in some cases provided to 

the SRO, tend to be less uniform than SRO audit trail rules relating to 

listed options.\84\ Some exchanges and FINRA have detailed audit trail 

data submission requirements for their members covering order entry, 

transmittal, and execution.\85\ For example, the rules of one exchange 

require the recording of the following information for each order 

originating with an exchange participant that is given to or received 

from another participant for execution, transmitted by an exchange 

participant to another market, or originating off the exchange and 

transmitted to an exchange participant, and subsequent execution of any 

such orders: \86\

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    \84\ For purposes of this release, the Commission does not 

consider SRO EBS rules to be audit trail rules.

    \85\ See Chicago Stock Exchange (``CHX'') Article 11, Rule 3(b); 

FINRA Rules 7400 to 7470 (the OATS rules); Nasdaq Rules 6950 to 6958 

(substantially similar to the OATS rules); BX Rules 6950 to 6958 

(substantially similar to OATS rules); NYSE Rule 123 and 132B; and 

NYSE Amex Equities Rule 123 and 132B (OTS rules). See supra Sections 

I.C. and I.D. for a discussion of FINRA's OATS rules and the NYSE 

and NYSE Amex's OTS rules, respectively.

    \86\ See CHX Article 11, Rule 3(b).

---------------------------------------------------------------------------



     Information relating to receipt or transmission of the 

order, including the material terms of the order; \87\ a unique order 

identifier; the identification of the clearing participant and the 

participant recording the order details; the date and time of order 

receipt or transmission (if applicable); the market or participant to 

which the order was transmitted or from which the order was received 

(if applicable);

---------------------------------------------------------------------------



    \87\ Id. The specific information required includes the symbol; 

number or shares or quantity of security; side of the market; order 

type; limit and/or stop price; whether the order is agency or 

proprietary; whether an order is a bona fide arbitrage order; 

whether the order is short; time in force; designation as held or 

not held; any special conditions or instructions (including any 

customer display instructions and any all-or-none conditions); and 

the date and time of any order expiration.

---------------------------------------------------------------------------



     Information relating to modifications to or cancellation 

of the order, including any modifications to the order, any 

cancellation of all or part of the order; the date and time of receipt 

and transmission of any modifications to the order or cancellations; 

and the identification of the party canceling or modifying the order; 

\88\

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    \88\ Id.

---------------------------------------------------------------------------



     For executions of the order,\89\ in whole or in part, the 

transaction price; the number of shares or quantity executed; the date 

and time of execution; the contra party to the execution; and any 

settlement instructions.\90\

---------------------------------------------------------------------------



    \89\ Id.

    \90\ Id. The participant also must record the system-generated 

times of recording this required information. This information must 

be recorded immediately after the information is received or becomes 

available. CHX Article 11, Rule 3(c). Additionally, before any such 

orders are executed, exchange participants must record the name or 

designation of the account for which the order is being executed. 

CHX Article 11, Rule 3(d). This rule does not apply to orders sent 

or received through the exchange's matching system or any other 

electronic systems the exchange recognizes as providing the required 

information in a format acceptable to the exchange. See CHX Article 

11, Rule 3, Interpretations and Policies .03.

---------------------------------------------------------------------------



    The audit trail rules of the other exchanges incorporate only 

standard books and records requirements in accordance with Section 17 

of the Exchange Act.\91\

---------------------------------------------------------------------------



    \91\ See e.g. National Stock Exchange (``NSX'') Chapter VI, Rule 

4.1.; BATS Chapter IV, Rule 4.1; CBOE Rule 15.1 (applicable to 

CBSX); ISE Stock Exchange Rule 1400; NYSE Arca Equities Rule 2.24; 

15 U.S.C. 78q et seq. For example, one exchange only requires its 

members to make and keep books and records and other correspondence 

in conformity with Section 17 of the Exchange Act and the rules 

thereunder, with all other applicable laws and the rules, 

regulations and statements of policy promulgated thereunder, and 

with the exchange's rules. See NSX Chapter VI, Rule 4.1.

---------------------------------------------------------------------------



G. Prior Commission Request for Comment



    The Commission has previously requested comment regarding cross-



[[Page 32562]]



market regulation, including whether changes should be made to existing 

audit trail rules, in two concept releases in 2003 and 2004.\92\

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    \92\ See Securities Exchange Act Release Nos. 47849 (May 14, 

2003), 68 FR 27722 (May 20, 2003) (File No. S7-11-03) (``Intermarket 

Trading Concept Release'') and 50700 (November 18, 2004), 69 FR 

71256 (December 8, 2004) (File No. S7-40-04) (``Concept Release 

Concerning Self-Regulation'').

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    In 2003, the Commission sought public comment on a petition 

submitted by Nasdaq that raised concerns about the impact of market 

fragmentation on the trading in, and regulation of trading in, Nasdaq-

listed securities.\93\ Nasdaq, through OATS, collected data from its 

members trading Nasdaq-listed securities, which the NASD then used to 

surveil for potential rule violations.\94\ Nasdaq requested that the 

Commission require all SROs trading Nasdaq-listed securities to 

implement an electronic audit trail identical to OATS.\95\ Nasdaq also 

noted that the available cross-market audit trail information provided 

by the Intermarket Surveillance Group (``ISG'') \96\ was comprised of 

audit trail information from each of the exchanges and provided two day 

delayed data at the clearing firm level, with time data from non-

synchronized clocks.\97\ Nasdaq believed that the information provided 

by ISG was insufficient to identify potentially violative activity.\98\

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    \93\ See letter to Jonathan G. Katz, Secretary, Commission, from 

Edward Knight, Executive Vice President and General Counsel, Nasdaq, 

dated April 11, 2003 (File No. 4-479) (``Nasdaq Petition''). In 

particular, Nasdaq was concerned over what it deemed ``unequal and 

inadequate regulation'' by other markets trading Nasdaq-listed 

securities. Id. at 2. See also Intermarket Trading Concept Release, 

supra note 92, at 27223.

    \94\ See Nasdaq Petition, supra note 93, at 10, and Intermarket 

Trading Concept Release, supra note 92, at 27224.

    \95\ See Nasdaq Petition, supra note 93, at 11, and Intermarket 

Trading Concept Release, supra note 92, at 27224.

    \96\ The ISG was created in 1983 and its members include all of 

the registered national securities exchanges and FINRA. ISG states 

that its goals are to enhance intermarket surveillance, assure the 

integrity of trading, and provide investor protection. To achieve 

these goals, ISG members share data such as audit trail information 

and short interest data among themselves. ISG provides surveillance 

tools to supplement its participant members' existing surveillance 

systems, such as the ISG Unusual Activity Report and the 

Consolidated Equity Audit Trail. These reports are made available 

from SIAC to members of ISG and are intended to provide a 

consolidated view across all markets of trade, quote, and clearing 

activity. See comment letter from Brian F. Colby, Chairman, 

Intermarket Surveillance Group, to Jonathan G. Katz, Secretary, 

Commission, dated June 18, 2003 (``ISG 2003 Comment Letter'') 

(commenting in response to the Intermarket Trading Concept Release).

    \97\ See Nasdaq Petition, supra note 93, at 10, and Intermarket 

Trading Concept Release, supra note 92, at 27224.

    \98\ See Nasdaq Petition, supra note 93, at 10-11, and 

Intermarket Trading Concept Release, supra note 92, at 27224.

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    In response to the Intermarket Trading Concept Release, the 

Commission received a variety of comments on intermarket surveillance 

and order audit trail issues.\99\ Of those commenters that addressed 

the general concept of creating a uniform electronic audit trail, some 

supported the concept while others did not.\100\

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    \99\ See comment letters from Darla C. Stuckey, Corporate 

Secretary, NYSE, to Jonathan G. Katz, Secretary, Commission, dated 

June 19, 2003 (``NYSE Comment Letter''); Jeffrey T. Brown, General 

Counsel, Cincinnati Stock Exchange, to Jonathan G. Katz, Secretary, 

Commission, dated June 19, 2003 (``CSE Comment Letter''); Michael J. 

Simon, Senior Vice President and Secretary, International Securities 

Exchange, Inc., to Jonathan G. Katz, Secretary, Commission, dated 

June 19, 2003 (``ISE Comment Letter''); William O'Brien, Chief 

Operating Officer, Brut, LLC, to Jonathan G. Katz, Secretary, 

Commission, dated June 19, 2003 (``Brut Comment Letter''); Kim Bang, 

President, Bloomberg Tradebook LLC, to Jonathan G. Katz, Secretary, 

Commission, dated June 20, 2003 (``Bloomberg Tradebook Comment 

Letter''); Donald D. Kittell, Executive Vice President, Securities 

Industry Association, to Jonathan G. Katz, Secretary, Commission, 

dated June 27, 2003 (``SIA Comment Letter''); Edward J. Joyce, 

President and Chief Operating Officer, CBOE, to Jonathan G. Katz, 

Secretary, Commission, dated June 30, 2003 (``CBOE Comment 

Letter''); W. Hardy Callcott, Senior Vice President and General 

Counsel, Charles Schwab & Co., Inc., to Jonathan G. Katz, Secretary, 

Commission, dated July 7, 2003 (``Schwab Comment Letter''); Richard 

Ketchum, General Counsel, Citigroup, to Jonathan G. Katz, Secretary, 

Commission, dated July 8, 2003 (``Citigroup Comment Letter''); John 

S. Markle, Associate General Counsel, Ameritrade Holding Corp., to 

Jonathan G. Katz, Secretary, Commission, dated July 10, 2003 

(``Ameritrade Comment Letter''); and Eric Schwartz, Managing 

Director, Goldman Sachs, and Duncan Niederauer, Co-Chief Executive 

Officer, Spear, Leeds & Kellogg, to Jonathan G. Katz, Secretary, 

Commission, dated July 25, 2003 (``Goldman Sachs and Spear, Leeds & 

Kellogg Comment Letter'').

    \100\ Of the commenters that clearly commented on the creation 

of a uniform intermarket audit trail, Citigroup and Goldman Sachs 

and Spear, Leeds & Kellogg were in favor of the idea, and Bloomberg 

supported a consolidated audit trail for those SROs trading Nasdaq-

listed securities. See Citigroup Comment Letter, supra note 99, at 

6; Goldman Sachs and Spear, Leeds & Kellogg Comment Letter, supra 

note 99, at 3-4; and Bloomberg Tradebook Comment Letter, supra note 

99, at 3. Brut, CBOE, and the NYSE did not appear to be in favor of 

a standardized intermarket audit trail. See Brut Comment Letter, 

supra note 99, at 5 (arguing for addressing improvements to 

surveillances falling short of Exchange Act requirements 

individually instead of ``costly and comprehensive technology 

overhauls''); CBOE Comment Letter, supra note 99, at 2 (explaining 

that it ``supports expanding the use of existing tools and enhancing 

[SRO] and Commission coordination to strengthen surveillance and to 

achieve more uniform regulation * * *'' and noting that the 

Commission could ``play a significant role in achieving uniform SRO 

regulation [by] establishing guiding principles on a variety of 

areas that affect all SROs.'' CBOE also noted that there should be 

enhanced coordination of SRO regulatory efforts through ISG and 

through 17d-2 agreements); and NYSE Comment Letter, supra note 99, 

at 5 (suggesting linking SRO audit trails in the manner of the ISG 

Consolidated Audit Trail).

---------------------------------------------------------------------------



    One commenter expressed the view that once broker-dealers have 

implemented systems necessary to comply with audit trail requirements, 

it would not be incrementally significant from a cost perspective to 

supply the same data in a common format to additional SROs, but that 

there would be a significant cost if the data to be captured and the 

methods of encoding and delivering the data differed from market to 

market.\101\ This commenter urged the Commission, if it were to require 

all market centers to adopt audit trail requirements, to ensure that 

the requirements are uniform and standardized. This commenter 

recommended a single standard for real time electronic trade and audit 

trail reporting, which would be applicable to all equity securities 

traded in the national market regardless of where listed or traded, and 

where data would be captured in a central depository, aggregated and 

made immediately available to each relevant market center, possibly 

through direct electronic data feeds.\102\ Likewise, another commenter 

stated that it would be preferable for there to be one uniform audit 

trail system, rather than each SRO adopting its own audit trail 

requirements and systems, to reduce the potential for conflicting rules 

and regulations and duplicative systems and technology 

requirements.\103\ Another commenter recommended that if the Commission 

determined that the need for a particular SRO to have enhanced audit 

trail information outweighs costs to member firms, SROs be required to 

coordinate efforts so as to reduce duplication of systems and 

regulatory efforts.\104\

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    \101\ See Goldman Sachs and Spear, Leeds & Kellogg Comment 

Letter, supra note 99, at 3.

    \102\ Id at 4.

    \103\ See Citigroup Comment Letter, supra note 99, at 6.

    \104\ See SIA Comment Letter, supra note 99, at 4. One commenter 

agreed that the Commission would be justified in requiring all SROs 

trading Nasdaq-listed securities to coordinate electronic audit 

trail systems with the NASD. See Bloomberg Tradebook Comment Letter, 

supra note 99. On the other hand, one commenter stated its belief 

that if there is a legitimate need to improve on the ISG audit 

trail, the markets should act jointly to do so, without being forced 

to adopt Nasdaq's proprietary audit trail. See ISE Comment Letter, 

supra note 99.

---------------------------------------------------------------------------



    Several commenters urged the Commission to consider the costs to 

broker-dealer firms of supplying the audit trail data when considering 

the appropriateness of extending OATS-like audit trail requirements to 

other market centers.\105\ One commenter stated the



[[Page 32563]]



belief that firms already are required to maintain all of the customer 

and transaction information that regulators would want under their 

current books and records requirements and that most firms do not 

believe there is a justification for requiring firms to spend the money 

necessary to send this information to every market center where an 

order may be routed.\106\ Another commenter was concerned about the 

impact on each individual market's structure of mandating 

uniformity.\107\

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    \105\ See SIA Comment Letter, supra note 99, at 4; Goldman Sachs 

and Spear, Leeds & Kellogg Comment Letter, supra note 99, at 3 

(stating that any decision about extending OATS to other markets 

should take into account the costs imposed on SROs, market 

intermediaries and the markets); and Ameritrade Comment Letter, 

supra note 99, at 3.

    \106\ See SIA Comment Letter, supra note 99, at 4.

    \107\ See CSE Comment Letter, supra note 99, at 6-7 (noting that 

the data formats among exchanges may vary due to structural needs 

and system designs; thus, while this commenter advocated that 

exchanges should be required to have internal audit trails tracking 

orders from inception to execution, it argued that design 

flexibility be maintained so that exchanges could create the audit 

trail systems best suited to monitor their markets).

---------------------------------------------------------------------------



    Some commenters supported the ISG as a facilitator of a coordinated 

regulation.\108\ One commenter noted that the ISG Consolidated Equity 

Audit Trail was a valuable supplement to existing SRO market data.\109\ 

One commenter also endorsed the ISG audit trail as well as CSE's Firm 

Order Submission system,\110\ stating that it was preferable to enhance 

these systems rather than conduct a ``mass migration'' to OATS.\111\ 

The ISG itself stated that no other market had reported any problems 

with ISG's timing of the incorporation of the clearing data into the 

Consolidated Equity Audit Trail, nor with the delivery of its audit 

trail information.\112\

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    \108\ See Ameritrade Comment Letter, supra note 99, at 2; CSE 

Comment Letter, supra note 99, at 13; ISE Comment Letter, supra note 

99, at 4; and NYSE Comment Letter, supra note 99, at 3.

    \109\ See NYSE Comment Letter, supra note 99.

    \110\ In its comment letter, CSE stated that its Firm Order 

Submission system (``FOS'') was more comprehensive than OATS and 

that the exchange had pioneered order audit trail development. See 

CSE Comment Letter, supra note 99. In its petition, Nasdaq argued 

that FOS was used voluntarily for settling commercial disputes 

between traders and was not meant for surveillance. See Nasdaq 

Petition, supra note 93, at 4.

    \111\ See Brut Comment Letter, supra note 99, at 6.

    \112\ See ISG 2003 Comment Letter, supra note 99.

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    In 2004, in a release seeking comment on a variety of issues 

relating to self-regulation, the Commission again sought public comment 

on intermarket surveillance.\113\ The Commission discussed the 

individual audit trails developed by several equity markets, COATS, and 

ISG's clearing level audit trail.\114\ The Commission suggested that a 

more robust intermarket order audit trail for options and equity 

markets could enhance the surveillance of order flow and requested 

comment on the issue.\115\

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    \113\ See Concept Release Concerning Self-Regulation, supra note 

92, at Sections IV.C and V.A.2.

    \114\ Id.

    \115\ Id. at 71277.

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    One commenter on the Concept Release Concerning Self-Regulation 

stated that, because trading in most liquid securities now occurs on 

multiple markets, no single SRO could capture a complete picture of all 

the trading in each product, all trading by one broker-dealer, and even 

all the trading related to a single order.\116\ This commenter stated 

its belief that the lack of uniform order and transaction data creates 

regulatory gaps and may provide incentives for market participants to 

conduct activities on markets where less regulatory data is collected 

on an automated basis.\117\ This commenter believed that minimum data-

collection standards should be required to ensure adequate regulation 

across all markets, and that consolidating that data would permit 

effective intermarket regulation while ensuring that no single market 

has a competitive advantage.\118\

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    \116\ See comment letter from Robert R. Glauber, Chairman and 

Chief Executive Officer, NASD, to Jonathan G. Katz, Secretary, 

Commission, dated March 15, 2005 (``NASD Comment Letter''), at 10.

    \117\ Id. at 11.

    \118\ Id.

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    Another commenter gave an example of how it believed the lack of 

real time reporting across markets was detrimental to surveillances 

relating to certain illegal activities. This commenter stated its 

belief that ``effective surveillances relating to insider trading, 

market manipulation and stock or options frontrunning in multiple 

markets can be hindered because away-market data such as order 

information, position limit reports and large position reports (for 

options) are not available electronically on a real time or near real 

time basis to the SRO that has generated an alert or flag in the course 

of its routine surveillance.\119\ This commenter suggested that 

consolidating this type of data in real time or near real time would 

permit SROs to immediately detect and review all aberrational activity 

in the multiple market centers, which could significantly deter or 

prevent violative conduct.\120\

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    \119\ See comment letter from Mary Yeager, Secretary, NYSE, to 

Jonathan G. Katz, Secretary, Commission, dated March 8, 2005, at 8.

    \120\ Id.

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    Another commenter stated its belief that the lack of a coordinated 

surveillance system is potentially one of the more significant problems 

facing the markets, and that as trading strategies become more 

sophisticated across multiple markets and national borders, the 

potential for sophisticated fraud also increases.\121\ One commenter 

recommended a consolidated information base that all regulators could 

access, stating that ``having separate and uncoordinated regulatory 

data is inefficient and detracts from the quality of regulation.'' 

\122\ Further, another commenter suggested a voluntary regulatory 

cooperative, jointly owned by participant exchanges, that would be the 

central regulator for surveillance, investigations and examinations and 

would include an electronic interface with the SEC; this commenter 

believed that the costs of developing an intermarket consolidated order 

audit trail system should be justified by the regulatory value of the 

data to be captured.\123\

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    \121\ See comment letter from Rebecca T. McEnally, Director, and 

Linda L. Rittenhouse, Senior Policy Analyst, Centre for Financial 

Market Integrity, to Nancy M. Morris, Secretary, Commission, dated 

July 14, 2006, at 6.

    \122\ See comment letter from Kim Bang, Chief Executive Officer, 

Bloomberg L.P., to Jonathan G. Katz, Secretary, Commission, dated 

March 8, 2005, at 4.

    \123\ See comment letter from Meyer S. Frucher, Chairman and 

Chief Executive Officer, Philadelphia Stock Exchange, to Jonathan G. 

Katz, Secretary, Commission, dated March 9, 2005, at 3.

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II. Basis for Proposed Rule



    As noted above, the U.S. securities markets have experienced a 

dynamic transformation in recent years. Rapid technological advances 

and regulatory developments have produced fundamental changes in the 

structure of the securities markets, the types of market participants, 

the trading strategies employed, and the array of products traded. 

Trading of securities has become more dispersed among exchanges and 

various other trading venues, including the OTC market. The markets 

have become even more competitive, with exchanges and other trading 

centers aggressively competing for order flow by offering innovative 

order types, new data products and other services, and through fees 

charged or rebates provided by the markets. The Commission 

preliminarily believes that with today's fast, electronic and 

interconnected markets, there is a heightened need for a single uniform 

electronic cross-market order and execution tracking system that 

includes more information than is captured by the existing SRO audit 

trails, and in a uniform format. Such a system would enable SROs to 

better fulfill their regulatory responsibilities to monitor for and 

investigate illegal activity in their markets and by their members. 

Further, the Commission preliminarily believes that such a system would 

enable the Commission staff to better carry out its



[[Page 32564]]



oversight of the NMS for securities and to perform market analysis in a 

more timely fashion, whether on one market or across markets.

    Each national securities exchange and national securities 

association must be organized and have the capacity to comply, and 

enforce compliance by its members, with its rules, and with the federal 

securities laws, rules, and regulations.\124\ The Commission 

preliminarily believes that the exchanges and FINRA could more 

effectively and efficiently fulfill these statutory obligations if the 

SROs had direct, electronic real time access to consolidated and more 

detailed order and execution information across all markets.\125\ 

Likewise, the Commission has the statutory obligation to oversee the 

exchanges and associations,\126\ and to enforce compliance by the 

members of exchanges and associations with the respective exchange's or 

association's rules, and the federal securities laws and 

regulations.\127\ The Commission also preliminarily believes that 

electronic real time access to consolidated information and more 

detailed cross-market order and execution information also would aid 

the Commission in carrying out its statutory obligations.

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    \124\ See, e.g., Sections 6(b)(1), 19(g)(1) and 15A(b)(2) of the 

Exchange Act, 15 U.S.C. 78f(b)(1), 78s(g)(1), and 78o-3(b)(2).

    \125\ The Commission notes that, if adopted as proposed, its 

Large Trader Proposal would not amend or impact the scope of any of 

the existing SRO audit trail rules. See Large Trader Proposal, supra 

note 11.

    \126\ See, e.g., Sections 2, 6(b), 15A(b), and 19(h)(1) of the 

Exchange Act, 15 U.S.C. 78b, 15 U.S.C. 78f(b), 15 U.S.C. 78o-3(b), 

and 15 U.S.C. 78s(h)(1).

    \127\ See, e.g., Section 19(h)(1) of the Exchange Act, 15 U.S.C. 

78s(h)(1).

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    Section 11A(a)(3)(B) of the Exchange Act provides in part that the 

Commission may, by rule, require SROs to act jointly with respect to 

matters as to which they share authority under the Exchange Act in 

regulating an NMS for securities.\128\ Pursuant to this authority, the 

Commission today is proposing a rule that would require all national 

securities exchanges and national securities associations to jointly 

submit to the Commission an NMS plan to create, implement, and maintain 

a consolidated audit trail that would be more comprehensive than any 

audit trail currently in existence.\129\ The proposed Rule would 

require the consolidated audit trail to capture certain information 

about each order for an NMS security, including the identity of the 

customer placing the order and the routing, modification, cancellation 

or execution of the order, in real time. In effect, the proposal would 

create a time-stamped ``electronic audit trail record or report'' for 

every order, and each market participant that touches the order would 

be required to report information about certain reportable events, such 

as routing or execution of the order.

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    \128\ See Section 11A(a)(3)(B) of the Exchange Act, 15 U.S.C. 

78k-1(a)(3)(B).

    \129\ See infra Section III for a description of proposed Rule 

613.

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    The Commission preliminarily believes that a consolidated order 

audit trail, such as the one proposed today, could enhance the ability 

of the SROs to carry out their obligations to regulate their markets 

and their members. The Commission also preliminarily believes that the 

proposed consolidated order audit trail could aid the Commission in 

fulfilling its statutory obligations to oversee SROs,\130\ monitor for 

the manipulation of security prices,\131\ and detect the use of 

manipulative or deceptive devices in the purchase or sale of a 

security,\132\ as well as to perform market reconstructions.

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    \130\ See, e.g., Sections 6(b)(1) and 19(h) of the Exchange Act, 

15 U.S.C. 78f(b)(1) and 78s(h).

    \131\ See Section 9 of the Exchange Act, 15 U.S.C. 78i.

    \132\ See Section 10 of the Exchange Act, 15 U.S.C. 78j.

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    The Commission preliminarily believes that proposed Rule 613 would 

benefit the industry, through potential cost reductions, by eliminating 

the need for certain SRO and Commission rules that currently mandate 

the collection and provision of information, at least with respect to 

NMS securities.\133\ The Commission also preliminarily believes that 

the proposal would benefit SROs, as well as the NMS for NMS securities, 

by ultimately reducing some regulatory costs, which may result in a 

more effective re-allocation of overall costs.\134\

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    \133\ See infra Section VI.A (discussion of benefits of the 

proposed Rule).

    \134\ Id.

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    The Commission recognizes that SRO rules requiring members to 

capture and disclose audit trail information already exist, and 

considered whether more modest improvements to existing rules, and 

corresponding SRO and member systems, would achieve the proposed Rule's 

objective at lower cost. For example, the Commission considered whether 

to standardize and expand the order information collected by existing 

audit trails, the EBS system, Rule 17a-25 and equity cleared reports. 

Without centralization of the trading data in a uniform electronic 

format, however, the Commission's goals of cross-market comparability 

and ready access could not be achieved. Additionally, this approach 

would not resolve concerns over how long it takes to obtain order and 

execution information because the data is often not available in real 

time and is provided only upon request.\135\ Similarly, the Commission 

considered whether assuring access to existing audit trails to other 

SROs and the Commission would sufficiently advance its goals. Even if 

SROs could view order activity on a real time basis on other exchanges, 

this would not eliminate the need for SROs to check multiple 

repositories to view and obtain order information. Moreover, the 

information may be captured, stored and displayed in a variety of 

formats, making comparisons more difficult. The Commission, therefore, 

preliminarily does not believe that ``retrofitting'' existing rules and 

systems would be a more effective way to achieve the goals of the 

proposed consolidated audit trail than having the requirements 

contained in a single Commission rule, and a single NMS plan.

---------------------------------------------------------------------------



    \135\ See infra note 149.

---------------------------------------------------------------------------



    As discussed below, the Commission preliminarily believes that 

existing audit trails are limited in their scope and effectiveness in 

varying ways. SRO and Commission staff also currently obtain 

information about orders or trades through the EBS system, Rule 17a-

25,\136\ and from equity cleared reports.\137\ However, as discussed 

below, the information provided pursuant to the EBS system, Rule 17a-

25, and the equity cleared reports also is limited, to varying degrees, 

in detail and scope.

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    \136\ 17 CFR 240.17a-25.

    \137\ See supra Sections I.A. and I.B. for a description of the 

EBS system, Rule 17a-25, and equity cleared reports.

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A. Lack of Uniformity of, and Gaps in, Current Required Audit Trail 

Information



    As noted above, the type of information relating to orders and 

executions currently collected by the exchanges and FINRA differs 

widely. For example, FINRA's OATS rules and NYSE/NYSE Amex's OTS rules 

(as supplemented by the requirements of NYSE and NYSE Amex Rule 123) 

both set forth in relative detail the information required to be 

recorded by a FINRA, NYSE or NYSE Amex member upon receipt or 

origination of an order; following transmission of an order to another 

FINRA, NYSE or NYSE Amex member; and following modification, 

cancellation or execution of such order.\138\ In contrast, some other



[[Page 32565]]



exchanges' rules only require their members to keep records in 

compliance with the member's recordkeeping obligations under Section 

17(a) of the Exchange Act and rules thereunder,\139\ rather than 

requiring that specific information be captured for orders sent to and 

executed on the exchange.\140\ Although Rule 17a-3 under the Exchange 

Act \141\ requires that a member make and keep detailed information 

with respect to each brokerage order, it does not, for instance, 

require information with respect to the routing of the order, or that 

each order be assigned a unique order identifier.\142\ Similarly, the 

scope of securities covered by existing audit trail rules also differs 

among the exchanges and FINRA. FINRA's OATS rules, for instance, apply 

to orders for equity securities listed on Nasdaq and OTC securities, 

while OTS captures information for orders in NYSE and NYSE Amex-listed 

cash equity securities.\143\

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    \138\ See FINRA Rules 7400 through 7470, NYSE Rules 123 and 

132B, NYSE Amex Equities Rule 123 and 132B, and supra Sections I.C. 

and I.D. See also CHX Article II, Rule 3; Nasdaq Rules 6950 to 6958; 

and BX Rules 6950 to 6958.

    \139\ 15 U.S.C. 78q(a).

    \140\ See, e.g., NSX Rules 4.1 and 4.2, NYSE Arca Equities Rule 

9.17, and BATS Rule 4.1.

    \141\ 17 CFR 240.17a-3.

    \142\ Rule 17a-3(a)(6)(i) under the Exchange Act requires that a 

member keep a memorandum of each brokerage order given or received 

for the purchase or sale of securities, whether executed or not, 

showing the terms and conditions of the order and any modification 

or cancellation thereof; the account for which it was entered; the 

time the order was received; the time of entry; the execution price; 

the identity of each associated person, if any, responsible for the 

account; the identity of any other person who entered or accepted 

the order on behalf of the customer, or, if a customer entered the 

order on an electronic system, a notation of that entry; and, to the 

extent feasible, the time of execution or cancellation. See 17 CFR 

240.17a-3(a)(6)(i).

    \143\ See supra Sections I.C. and I.D. See also supra the 

discussion in the introduction to Section II relating to the 

Commission's consideration of whether ``retrofitting'' existing SRO 

audit trail rules and systems would achieve the goals of the 

proposed consolidated audit trail.

---------------------------------------------------------------------------



    While there is no current requirement that all SROs record the same 

information for orders and executions in the same or different 

securities, each SRO has a statutory obligation to regulate its market 

and its members. The Commission is concerned that the lack of 

uniformity as to the type of audit trail information gathered by the 

different exchanges and FINRA, and the lack of compatibility in the 

format of each SRO's audit trail data, may hinder the ability of SRO 

and Commission staff to effectively and efficiently monitor for, 

detect, and deter illegal trading that occurs across markets. If a 

market participant is engaging in manipulative behavior across various 

markets, but the rules of one market do not require its members to 

provide detailed information regarding the orders sent to its market, 

it may be difficult for regulators to determine that trading activity 

on one market was related to trading activity on another market. For 

example, Section 9 of the Exchange Act expressly prohibits ``wash 

sales.'' \144\ A trader could attempt to disguise such trading by 

executing various legs of wash transactions on different markets. 

Individual market surveillance based on individual SRO audit trail data 

would not always be able to detect this kind of cross-market abuse.

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    \144\ See Section 9(a)(1) of the Exchange Act, 15 U.S.C. 

78i(a)(1). Wash sales are transactions involving no change in 

beneficial ownership. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 

205 n. 25 (1976).

---------------------------------------------------------------------------



    Further, while current order audit trail rules provide a framework 

for capturing order information, the Commission is concerned that 

certain information about orders and executions that would be useful to 

efficient and effective regulation of inter-market trading activity and 

prevention of manipulative practices is not captured by existing audit 

trails. Most importantly, the existing audit trails do not require 

members to provide information identifying the customer submitting an 

order, the person with investment discretion for the order, or the 

beneficial owner. The identity of this ``ultimate customer,'' however, 

often is necessary to tie together potential manipulative activity that 

occurs across markets and through multiple accounts at various broker-

dealers. While the Commission notes that exchange and FINRA regulatory 

staff, as well as Commission staff, eventually can obtain identifying 

customer or beneficial account information by submitting requests for 

information through ISG or to various broker-dealers involved in 

potentially wrongful activities, this process can result in significant 

delays in investigating market anomalies or potentially manipulative 

behavior. The Commission preliminarily believes that gaps such as this 

in required audit trail information may hinder the ability of 

regulatory authorities to enforce compliance with SRO rules and the 

federal securities laws, rules, and regulations in a timely manner.

    In addition, an exchange's audit trail information effectively ends 

when an order is routed to another exchange. For example, although the 

NYSE's OTS rule requires a NYSE member or member organization to record 

the fact that an order was transmitted to a non-member, the rules do 

not require the recording of what subsequently happens to the 

order.\145\ Likewise, FINRA's OATS data collection effectively ends if 

an order is routed from a member of FINRA to an exchange.\146\ As a 

result, key pieces of information about the life of an order may not be 

captured, or easily tracked, if an order is routed from one exchange to 

another, or from one broker-dealer to an exchange. For example, the 

name, or identifier, of a broker-dealer that initially received an 

order may be captured by the audit trail of the exchange of which that 

broker-dealer is a member when the broker-dealer sends the order to the 

exchange. However, if the order is routed to and executed on a second 

exchange, the identifying information for that initial broker-dealer 

may not be captured by the second exchange's audit trail requirements.

---------------------------------------------------------------------------



    \145\ See NYSE Rule 132B(c)(3).

    \146\ See FINRA Rule 7440(c)(6). The Commission understands that 

FINRA is able to link OATS order information to Nasdaq order and 

execution data.

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    Similarly, under current audit trail rules, an incoming order may 

be assigned an order identifier by the initial receiving exchange; 

however, if the order is routed to a second exchange, there is no 

requirement that this order identifier be passed along to or maintained 

by the second exchange. Thus, one order that is routed across markets 

can have multiple order identifiers, each unique to one exchange. The 

Commission preliminarily believes that, from a regulatory standpoint, 

the lack of standardized cross-market order identifiers can pose 

significant obstacles and delays in effectively detecting and deterring 

manipulative behavior because SRO and Commission staff cannot readily 

collect the necessary data (that is, they cannot readily piece together 

activity related to the same order or the same customer occurring 

across several markets) to determine whether violative behavior has 

occurred.

    Additionally, the Commission is concerned that the data generated 

by the EBS system or that is available through the equity cleared 

reports also lacks items of information needed to match up order and 

trade information across markets to fully understand a particular 

trading pattern or to reconstruct a certain type of trading activity. 

EBS data does not include the time of execution, and often does not 

include the identity of the beneficial owner.\147\ The equity cleared 

data also lacks the time of



[[Page 32566]]



execution, as well as time of order receipt, often the identity of the 

beneficial owner, the identity of the broker-dealer(s) that received 

and/or executed the order (if different from the clearing broker-

dealer), and short sale borrow and fails information. In order to 

obtain the time an order was received or the identity of the beneficial 

owner, therefore, SRO or Commission staff may take the additional step 

of submitting an electronically generated blue sheet request to the 

clearing broker-dealer identified in the equity cleared report to ask 

that broker-dealer to identify the beneficial ownership of the 

account(s) effecting the relevant transactions and/or the introducing 

broker,\148\ and this may take a few steps if the clearing broker-

dealer does not know the introducing broker, but only the executing 

broker (if different). If the beneficial ownership of the account(s) 

was not specified in the clearing broker-dealer's response, the staff 

could then ask the introducing broker-dealer for the time an order was 

received and the beneficial account holder information. Often, 

additional steps are required to identify the beneficial account 

holder, such as when the ``customer'' is an omnibus account. 

Furthermore, the equity cleared data could be duplicative. For example, 

one side of a trade can appear multiple times in the equity cleared 

reports because it may be reported by a specialist, a clearing broker-

dealer, and the broker-dealer holding the customer's allocation account 

and the customer's trading account.

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    \147\ If a customer has an account directly with a clearing 

firm, or if an introducing firm clears its customers' transactions 

on a fully disclosed basis with the clearing firm, the clearing firm 

should be able to identify the beneficial owner of the account on 

its EBS response.

    \148\ For purposes of this discussion, introducing broker means 

the broker-dealer that received or originated the order, and that is 

not also the clearing broker.

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    The lack of cohesive, readily available order and execution 

information creates significant hurdles for investigators at both the 

SROs and at the Commission. In order for SROs to investigate potential 

violations of their rules and the federal securities laws and rules by 

their members, the SROs should have the ability to analyze the 

activities of their members taking place across different market 

centers. This requires the accumulation and interpretation of data from 

numerous, disparate sources sometimes presenting inconsistent 

information. Similarly, the experience of the Commission staff shows 

that the lack of a consolidated audit trail results in the investment 

of significant resources to investigate potential market abuses. For 

example, when investigating potential insider trading and other market 

manipulations, Commission staff first obtains an equity cleared report 

to identify the clearing broker-dealers for trades involving the stock 

under investigation and the trading volume for a particular period of 

time. Then staff sends document requests to those clearing broker-

dealers to identify the broker-dealers that executed trades in the 

stock over that period of time. This process can be complicated further 

by potential market manipulators that trade through small introducing 

brokers or use offshore corporate accounts and prime brokerage or other 

arrangements to conduct transactions. Commission staff also may request 

trade data for additional time periods identified during the course of 

the investigation, resulting in further delays. Commission staff thus 

often must make multiple requests to broker-dealers to obtain 

sufficient order information about the purchase or sale of a specific 

security to be able to adequately analyze trading. These multiple 

requests and responses can take a significant amount of time and delay 

the Commission's efforts to analyze the data on an expedited 

basis.\149\ While the investigative protocols of each SRO may differ 

from those used by the Commission, in each case, collecting, 

interpreting and analyzing diverse data sources is labor intensive and 

time consuming.

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    \149\ Rule 17a-25 (as well as the SRO EBS rules) does not 

specify a definitive deadline by which such information must be 

furnished to the Commission and, in the Commission's experience, 

data collected through the EBS system often is subject to lengthy 

delays, particularly with respect to files involving a large number 

of transactions over an extended period of time.

---------------------------------------------------------------------------



    The Commission is concerned that inadequacies in the current audit 

trail rules, EBS system, and equity cleared reports also impede the 

ability of SRO or Commission staff to promptly analyze trading 

patterns, particularly to prepare market reconstructions. For example, 

if Commission staff wants to undertake an analysis of an extreme market 

movement over a limited period of time, Commission staff would need to 

analyze audit trail information and EBS submissions of trading data to 

determine if specific trading strategies, techniques or participants 

appeared to be associated with the movement. Because of difficulties in 

linking trades in the audit trails with aggregate day-end trading data 

in EBS submissions, conducting this analysis is difficult and time-

consuming. While the audit trail data could identify the precise 

execution times of trades by particular clearing broker-dealers, it 

would not identify the specific customers or beneficial owners involved 

in the trades. On the other hand, while EBS submissions provide summary 

trading information for particular accounts at the clearing broker-

dealers, they lack execution times for these trades. Further 

complications can arise due to the common practice for large traders to 

route their orders through multiple accounts at multiple clearing 

firms, as well as practices at some firms that use ``average price 

accounts'' to effect trades that are eventually settled in multiple 

proprietary and/or customer accounts. While these practices are not, in 

themselves, improper, their use makes it more challenging to establish 

with certainty when trading on behalf of a particular trader was 

effected during the trading session.

    The Commission preliminarily believes that the proposed 

consolidated audit trail would help alleviate the difficulties faced by 

Commission staff in performing market reconstructions, such as those 

described in the above example, by requiring that national securities 

exchanges, national securities associations, and their members provide 

order and execution data to one central location, largely on a real 

time basis, in a uniform electronic format. Having this information 

readily available in a central location would reduce the need for staff 

to request and collect such information from multiple broker-dealers 

and then examine, analyze and reconcile the disparate information 

provided to accurately ``reconstruct'' the market.\150\

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    \150\ As discussed, the Commission preliminarily believes that 

the proposal would improve the ability of regulators to conduct 

timely and accurate trading analyses for market reconstructions and 

complex investigations, as well as inspections and examinations. 

Indeed, the Commission believes that the proposed consolidated audit 

trail, if implemented, would have significantly enhanced the 

Commission's ability to quickly reconstruct and analyze the severe 

market disruption that occurred on May 6, 2010. If approved and 

implemented, the proposal also would enhance the Commission's 

ability to similarly respond to future severe market events.

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B. Books and Records Requirements



    Because brokers-dealers often are members of several exchanges and 

FINRA, they are subject to and must comply with the differing audit 

trail rules. Brokers and dealers also have a statutory obligation to 

maintain records in compliance with Commission and SRO rules.\151\ As a 

result of the differing audit trail rules, brokers and dealers may be 

required to keep records to comply with each audit trail rule relating 

to trading in a certain security. Thus, some broker-dealers may now



[[Page 32567]]



face significant costs to comply with varying audit trail rules.\152\

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    \151\ See Section 17(a)(1) of the Exchange Act, 15 U.S.C. 

78q(a)(1), and Rules 17a-3 and 17a-4 under the Exchange Act, 17 CFR 

240.17a-3 and 17a-4.

    \152\ See Goldman Sachs and Spear, Leeds & Kellogg Comment 

Letter, supra note 99, at 3, and SIA Comment Letter, supra note 99, 

at 3 (each commenting on the Nasdaq Petition and Intermarket Trading 

Concept Release).

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C. Time Lags



    Current audit trail rules require that an SRO's members submit 

order and execution information by the end of each business day (in the 

case of OATS), or in certain cases, upon request by the regulating 

entity (for instance, like OTS).\153\ End-of-day or upon request 

reporting, by definition, limits regulators' ability to carry out real 

time cross-market surveillance and investigations of market anomalies. 

The Commission preliminarily believes that end-of-day reporting, 

coupled with the current laborious process of identifying the ultimate 

customer responsible for a particular securities transaction that may 

take several days, weeks or even months, can impact effective oversight 

by hindering the ability of SRO regulatory staff to identify 

manipulative activity close in time to when it is occurring, and 

respond to instances of potential manipulation quickly. This process 

also hinders the Commission's ability to detect and investigate 

potentially manipulative behavior. Manipulative activity by some market 

participants can result in other market participants, such as retail 

investors, losing money. The longer that manipulative behavior goes 

undetected over time, the greater the potential harm to investors. 

Further, timely pursuit of potential violations can be important in 

seeking to freeze and recover any profits received from illegal 

activity.

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    \153\ See supra Sections I.C. and I.D.

---------------------------------------------------------------------------



D. Access to Audit Trail Information



    While each SRO has direct access to audit trail information 

received from its members, as well as its own data relating to orders 

received and executed on its market, one SRO cannot directly or easily 

access the audit trail information collected by other SROs, despite the 

interconnectedness of today's securities markets and the fact that 

orders are often routed from one marketplace to another marketplace for 

execution. In addition, Commission staff itself does not have immediate 

access to the exchanges' and FINRA's audit trail information, and 

instead must specifically request that an exchange or FINRA produce its 

audit trail information.\154\

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    \154\ The different data fields and unique formats of each SRO 

audit trail present difficulties for Commission examinations and 

investigations, where time constraints can make it impractical to 

manually consolidate diverse data sets.

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    The Commission notes that ISG provides a framework for the 

voluntary sharing of information and coordination of regulatory efforts 

among the exchanges and FINRA to address potential intermarket 

manipulations and trading abuses. The Commission believes that ISG 

plays an important role in information sharing among markets that trade 

the same securities, as well as related securities or futures on the 

same products.\155\ However, the information provided to ISG, which is 

drawn from each individual exchange's audit trail and books and 

records, is not in any uniform or comparable format. In addition, 

information is only submitted to ISG upon a request by one of its 

members, and the information is not provided by ISG members in real 

time. Further, the operation of ISG is not subject to the Commission's 

oversight, including approval of what, and how, information is 

collected from and shared across SROs. The Commission preliminarily 

believes that it is now appropriate to mandate a structure whereby the 

regulatory staff of all exchanges and FINRA, as well as the Commission, 

can directly access comprehensive uniform cross-market order and 

execution information in real time pursuant to Commission rule, rather 

than through an information-sharing cooperative governed only by 

contract.

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    \155\ See supra note 96.

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E. Scalability of the EBS System and Rule 17a-25



    Although the EBS system and Rule 17a-25 can be used to obtain 

information in conjunction with the SRO audit trail information, the 

Commission is concerned with the ability of the EBS system, as enhanced 

by Rule 17a-25, to keep pace with changes in the securities markets 

over recent years. Various changes in market dynamics have affected the 

utility of the EBS system and Rule 17a-25. For example, decimal trading 

has increased the number of price points for securities, and the volume 

of quotations and orders has correspondingly dramatically increased. 

Thus, the volume of transaction data subject to reporting under the EBS 

system can be significantly greater than the EBS system was intended to 

accommodate in a typical request for data. As a request-based system 

that is most useful when targeting trading in a specific security for a 

specific time, the EBS system is not well-suited as a broad-based tool 

to detect illegal or manipulative activity. The increased use of 

sponsored access (or other indirect access to an exchange) also has 

made it more difficult to use the EBS system and Rule 17a-25 to 

identify the ultimate customer that originates an order because the 

member broker-dealer through whom an order is sent to an exchange may 

not know the identity of the underlying customer.\156\

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    \156\ Indirect access is when a non-member of an exchange 

accesses an exchange through a member. For example, to comply with 

regulatory obligations such as Rule 611 of Regulation NMS (17 CFR 

242.611), exchanges increasingly rely on indirect access to other 

exchanges through member broker-dealers of the other exchanges, so 

called ``private linkage'' access. Sponsored access is one type of 

indirect access and is governed by exchange rules. See, e.g., Nasdaq 

Rule 4611(d). The Commission recently proposed rules that would 

address sponsored access to exchanges. See Securities Exchange Act 

Release No. 61379 (January 26, 2010), 75 FR 4713 (January 29, 2010).

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    In addition, the increasing number of alternative trading venues 

creates more opportunities for orders to be routed to other markets and 

thus can result in delays in producing EBS data as requests must be 

made to several broker-dealers in the ``chain'' of an order. Finally, 

the increased trading of derivative instruments and products also has 

affected the ongoing effectiveness of the EBS system and Rule 17a-25. A 

market participant can use derivative instruments and products as a 

substitute for trading in a particular equity, and likewise engage in 

illegal trading activity in derivative instruments and products. 

However, because information related to some derivative instruments 

over which the Commission has anti-fraud authority (such as security-

based swaps) is not included within the EBS data or provided pursuant 

to Rule 17a-25, the EBS system and Rule 17a-25 are not effective tools 

for ascertaining activity in those markets or how that activity may be 

affecting the underlying equity market.\157\

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    \157\ See infra Section III.A for a discussion of the scope of 

products to be covered by the proposed Rule and the intent to expand 

the scope to cover other products and transactions.

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    In the Commission staff's experience, the EBS is most effective 

when investigating or analyzing trading in a small sample of securities 

over a limited period of time. But even under those circumstances, 

Commission staff often must make multiple requests to broker-dealers to 

obtain sufficient order information about the purchase or sale of a 

specific security to be able to adequately analyze the suspect trading. 

These multiple requests and responses can take a significant amount of 

time. The Commission preliminarily believes that the EBS system may no 

longer be able to fully support the regulatory



[[Page 32568]]



challenges currently facing SRO and Commission regulatory staff.

    The consolidated audit trail that the Commission is proposing today 

would provide significant improvements in the order and execution 

information available to SRO and Commission staff in several discrete 

ways. Among other things, the proposed audit trail would require that 

national securities exchanges and national securities associations and 

their members submit uniform order and execution information to a 

central repository on a real time basis, where possible. National 

securities exchanges and associations, and their member firms, would be 

required to identify the person with investment discretion for the 

order, and beneficial account holder, if different, along with other 

key information about the customer or proprietary desk that placed or 

originated the order. The proposed consolidated audit trail also would 

cover any action taken with respect to the order through execution, or 

cancellation, as applicable, and thus would allow regulators to more 

easily trace the order from inception to cancellation or 

execution.\158\

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    \158\ The proposed Rule also would require the reporting of 

certain post-trade information. See infra Section III.D.2.

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    The Commission preliminarily believes that the proposed audit trail 

information would greatly enhance the ability of SRO staff to 

effectively monitor and surveil the securities markets on a real time 

basis, and thus to detect and investigate illegal activity in a more 

timely fashion, whether on one market or across markets. The Commission 

also preliminarily believes that the proposal would improve the ability 

of Commission and SRO staff to conduct more timely and accurate trading 

analysis, as well as to conduct more timely and accurate market 

reconstructions, complex enforcement inquiries or investigations, and 

inspections and examinations of regulated entities and SROs.



III. Description of Proposed Rule



    To help address the deficiencies described above, the Commission is 

proposing to adopt a rule that would require national securities 

exchanges \159\ and national securities associations \160\ to create 

and implement a consolidated audit trail that captures customer and 

order event information, in real time, for all orders in NMS 

securities, across all markets, from the time of order inception 

through routing, cancellation, modification, or execution.

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    \159\ National securities exchange is defined in Rule 600(a)(45) 

of Regulation NMS as any exchange registered pursuant to Section 6 

of the Exchange Act (15 U.S.C. 78f). 17 CFR 242.600(a)(45).

    \160\ National securities association is defined in Rule 

600(a)(44) of Regulation NMS as any association of brokers and 

dealers registered pursuant to Section 15A of the Exchange Act (15 

U.S.C. 78o-3). 17 CFR 242.600(a)(44). As noted above, see supra note 

12, FINRA currently is the only national securities association to 

which the proposal would apply, as the NFA is restricted to 

regulating its members who are registered as broker-dealers in 

security futures products due to its limited purpose registration 

with the Commission under Section 15A(k) of the Exchange Act, 15 

U.S.C. 78o-3(k). The NFA could, of course, seek to expand its 

current registration. Thus, for ease of reference, this proposal 

refers to FINRA but the proposed requirements would apply to any 

national securities association registered with the Commission.

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    If adopted, the proposed Rule would require each national 

securities exchange and national securities association to file jointly 

with the Commission on or before 90 days from approval of this proposed 

Rule an NMS plan to govern the creation, implementation, and 

maintenance of a consolidated audit trail and a central 

repository.\161\ The NMS plan would be required to be filed with the 

Commission pursuant to, and subject to the requirements of, Rule 608 of 

Regulation NMS.\162\ As such, the proposed NMS plan would be published 

in the Federal Register and subject to public notice and comment in 

accordance with Rule 608(b). Further, the NMS plan filed pursuant to 

the proposed Rule, or any amendment to such a plan, would not become 

effective unless approved by the Commission or otherwise permitted in 

accordance with Rule 608.\163\

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    \161\ See infra Section III.F. for a discussion of the central 

repository. The proposed Rule would explicitly require each national 

securities exchange and national securities association to be a 

sponsor of the NMS plan submitted pursuant to the Rule and approved 

by the Commission. See proposed Rule 613(a)(4).

    \162\ 17 CFR 242.608. See proposed Rule 613(a)(2).

    \163\ See proposed Rule 613(a)(5) and 17 CFR 242.608.

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    The Commission would expect the exchanges and FINRA to cooperate 

with each other and to take joint action as necessary to develop, file, 

and ultimately implement a single NMS plan to fulfill this requirement. 

The Commission requests comment on this approach. Specifically, the 

Commission requests comment on whether requiring the exchanges and 

associations to act jointly by filing an NMS plan that would contain 

the requirements for a consolidated audit trail is the most effective 

and efficient way to achieve the objectives of a consolidated audit 

trail. Or, should the Commission require the exchanges and associations 

to standardize or otherwise enhance their existing rules? What approach 

would be most efficient in improving the ability to monitor cross-

market trading, or undertake market analysis or reconstructions, and 

why?

    As discussed in further detail below, the proposed Rule would 

require that the NMS plan include provisions regarding: (1) The 

operation and administration of the NMS plan; (2) the creation and 

oversight of a central repository; (3) the data required to be provided 

by SROs and their members to the central repository; (4) clock 

synchronization; (5) compliance by national securities exchanges, 

FINRA, and their members with the proposed Rule and the NMS plan; and 

(6) the possible expansion of the NMS plan to products other than NMS 

securities.

    The proposed Rule is designed to allow the national securities 

exchanges and national securities associations to develop the details 

of the NMS plan that they believe should govern the creation, 

implementation and maintenance of the central repository and 

consolidated audit trail, within the parameters set forth in the 

proposed Rule. The Commission believes that the national securities 

exchanges and national securities associations working jointly are in 

the best position to propose for themselves and their members the 

specifics of how the consolidated audit trail should be structured and 

administered. To this end, the proposed Rule contains a broad framework 

within which the exchanges and associations would provide the details 

that they believe would result in a functional, cooperative mechanism 

to create and maintain a consolidated audit trail, as well as certain 

explicit requirements the NMS plan must meet. As noted above, the 

proposed NMS plan developed by the exchanges and FINRA would be subject 

to public comment and approval by the Commission.



A. Products and Transactions Covered



    Proposed Rule 613 would apply to secondary market transactions in 

all NMS securities, which means NMS stocks and listed options.\164\ The 

Commission ultimately intends for the consolidated audit trail to cover



[[Page 32569]]



secondary market transactions in other securities, including equity 

securities \165\ that are not NMS securities, corporate bonds, 

municipal bonds, and asset-backed securities and other debt 

instruments; \166\ credit default swaps, equity swaps, and other 

security-based swaps; and any other products that may come under the 

Commission's jurisdiction in the future. Further, the Commission 

preliminarily believes that it would be beneficial to provide for the 

possible expansion of the consolidated audit trail to include 

information on primary market transactions in NMS stocks and other 

equity securities that are not NMS stocks, as well as primary market 

transactions in debt securities.\167\ Such information could be used to 

monitor for violations of certain rules under the Exchange Act, such as 

Regulation M and Rule 10b-5 under the Exchange Act.\168\ Further, 

FINRA's transaction reporting requirements for debt securities already 

cover primary market transactions in debt securities,\169\ and thus 

FINRA members should already be recording information relating to such 

transactions that could be included in an audit trail. The Commission 

proposes that the scope of the Rule initially be limited to secondary 

market transactions in NMS securities, however, to allow for a 

manageable implementation of the proposed consolidated audit trail, and 

because market participants already have experience with audit trails 

for these types of transactions in these securities.

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    \164\ NMS security is defined in Rule 600(a)(46) of Regulation 

NMS to mean any security or class of securities for which 

transaction reports are collected, processed, and made available 

pursuant to an effective transaction reporting plan, or an effective 

national market system plan for reporting transactions in listed 

options. 17 CFR 242.600(a)(46). NMS stock is defined in Rule 600(47) 

to mean any NMS security other than an option. 17 CFR 

242.600(a)(46). A listed option is defined in Rule 600(a)(35) of 

Regulation NMS to mean any option traded on a registered national 

securities exchange or automated facility of a national securities 

association. 17 CFR 242.600(a)(35).

    \165\ Equity security is defined in Section 3(a)(11) of the 

Exchange Act to include any stock or similar security; or any 

security future on any such security; or any security convertible, 

with or without consideration, into such a security, or carrying any 

warrant or right to subscribe to or purchase such a security; or any 

such warrant or right; or any other security which the Commission 

shall deem to be of similar nature and consider necessary or 

appropriate, by such rules and regulations as it may prescribe in 

the public interest or for the protection of investors, to treat as 

an equity security. See 15 U.S.C. 78c(a)(11).

    Rule 3a11-1 under the Exchange Act defines equity security to 

include any stock or similar security, certificate of interest or 

participation in any profit sharing agreement, preorganization 

certificate or subscription, transferable share, voting trust 

certificate or certificate of deposit for an equity security, 

limited partnership interest, interest in a joint venture, or 

certificate of interest in a business trust; any security future on 

any such security; or any security convertible, with or without 

consideration into such a security, or carrying any warrant or right 

to subscribe to or purchase such a security; or any such warrant or 

right; or any put, call, straddle, or other option or privilege of 

buying such a security from or selling such a security to another 

without being bound to do so. See 17 CFR 240.3a11-1.

    \166\ Asset-backed security means a security that is primarily 

serviced by the cash flows of a discrete pool of receivables or 

other financial assets, either fixed or revolving, that by their 

terms convert into cash within a finite time period, plus any rights 

or other assets designed to assure the servicing or timely 

distributions of proceeds to the security holders; provided that in 

the case of financial assets that are leases, those assets may 

convert to cash partially by the cash proceeds from the disposition 

of the physical property underlying such leases. See 17 CFR 

229.1101(c)(1).

    \167\ A primary market transaction is any transaction other than 

a secondary market transaction and refers to any transaction where a 

person purchases securities in an offering. See, e.g., FINRA Rule 

6710 (defining two types of primary market transactions for TRACE-

eligible securities, a List or Fixed Offering Price Transaction or a 

Takedown Transaction).

    \168\ See 17 CFR 242.100 et. seq. and 17 CFR 240.10b-5. Rule 105 

prohibits the short selling of equity securities that are the 

subject of a public offering for cash and the subsequent purchase of 

the offered securities from an underwriter or broker or dealer 

participating in the offering if the short sale was effected during 

a period that is the shorter of the following: (i) Beginning five 

business days before the pricing of the offered securities and 

ending with such pricing; or (ii) beginning with the initial filing 

of such registration statement or notification on Form 1-A or Form 

1-E and ending with the pricing. Thus, Rule 105 prohibits any person 

from selling short an equity security immediately prior to an 

offering and purchasing the security by participating in the 

offering. The primary market transaction data would allow for the 

ability to more quickly identify whether any participant in the 

offering sold short prior to the offering.

    Rule 10b-5 prohibits any act or omission resulting in fraud or 

deceit in connection with the purchase or sale of any security. The 

primary market transaction data for bonds would allow for 

identification of the cost basis for bond purchases by 

intermediaries and make it easier to assess whether subsequent mark-

ups to retail investors in primary offerings are fair and reasonable 

and, if not, whether there has been a violation of the antifraud 

provisions of the federal securities laws.

    \169\ See FINRA Rule 6730(a)(5).

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    As discussed above, the Commission believes that implementing a 

consolidated audit trail for NMS securities would aid the SROs in more 

effectively and efficiently carrying out their regulatory 

responsibilities. It would also assist the Commission in carrying out 

its statutory responsibilities. The Commission further preliminarily 

believes that a timely expansion of the scope of the consolidated audit 

trail beyond NMS securities would be beneficial, as illegal trading 

strategies that the consolidated audit trail would be designed to help 

detect and deter, such as insider trading, may involve trading in 

multiple related products other than NMS securities across multiple 

markets.

    For example, the Commission routinely receives information relating 

to possible upward manipulation of security prices in violation of 

Sections 9(a) and 10(b) of the Exchange Act,\170\ and alleged abusive 

short selling in the over-the-counter market, which includes FINRA's 

Bulletin Board and Pink Sheets. If the consolidated audit trail were 

expanded to cover these securities, it would be possible for SROs and 

the Commission to make comparisons between current and historical data 

in a more timely manner than is currently possible, to more quickly 

determine whether or not a complaint merits additional attention and 

the corresponding commitment of enforcement resources. Similarly, to 

the extent that instruments currently not considered NMS securities can 

be substitutes for long or short positions in NMS securities, having 

access to an audit trail that documents trading activity in such 

securities would improve the Commission's ability to make a risk 

assessment as to information it has received about possibly 

manipulative activity.\171\ Having ready access to this information in 

an audit trail also would improve the Commission's inspection process 

because it would enhance risk assessment and allow for better selection 

as to which broker-dealers to examine. For example, the information 

would allow for better trend analysis and outlier identification. It 

also would improve pre-examination work and the asset verification 

process,\172\ and focus document requests, making the examination 

process more efficient for the Commission staff and the registrants 

subject to the process.

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    \170\ 15 U.S.C. 78i(a) and 78j(b).

    \171\ The Commission's Division of Enforcement has recently 

established an Office of Market Intelligence. This Office, among 

other things, conducts intake and triage of investor and industry 

referrals that are received by the Commission each year. Currently, 

a thorough review of referrals requires extensive resource 

allocation as the primary source for evaluating trading data in the 

EBS system. Expansion of the consolidated audit trail to non-NMS 

securities would allow that Office to evaluate the merits of each 

referral faster and more effectively, and more efficiently allocate 

enforcement resources to appropriate cases.

    \172\ Asset verification is an exam process that attempts to 

locate independent information to verify certain customer positions, 

transactions, and balances at broker-dealers.

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    To help ensure that such an expansion would occur in a reasonable 

time and that the systems and technology that would be used to 

implement the Rule as proposed are designed to be easily scalable, 

proposed Rule 613(i) would require that the NMS plan contain a 

provision requiring each national securities exchange and national 

securities association that is a sponsor of the plan \173\ to jointly 

provide the Commission a document outlining how the sponsors could 

incorporate into the consolidated audit trail information with respect 

to: (1) Equity securities that



[[Page 32570]]



are not NMS securities; (2) debt securities, including asset-backed 

securities; and (3) primary market transactions in NMS stocks, equity 

securities that are not NMS securities, and debt securities. The 

sponsors specifically would be required to address, among other things, 

details for each order and reportable event that they would recommend 

requiring to be provided; which market participants would be required 

to provide the data; an implementation timeline; and a cost estimate.

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    \173\ Sponsor, when used with respect to an NMS plan, is defined 

in Rule 600(a)(70) of Regulation NMS to mean any self-regulatory 

organization which is a signatory to such plan and has agreed to act 

in accordance with the terms of the plan. See 17 CFR 242.600(a)(70).

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    The Commission requests comment on the proposed scope of products 

to be covered by the consolidated audit trail. Should the consolidated 

audit trail initially cover securities other than NMS securities? Why 

or why not? The Commission also requests comment on whether the 

approach to expand the consolidated audit trail to include the products 

and transactions specified above represents an appropriate expansion of 

the consolidated audit trail, and what additional capital commitment 

would be required by the various market participants to implement such 

an expansion. Please be specific in your response with respect to 

different products or transactions (e.g. security-based swaps, or 

primary market transactions in NMS stocks). Are there other securities 

or products that should be identified and included in a future 

expansion? What would be the challenges to any expansion to the 

products and transactions listed above? Are there any other actions 

that the Commission or SROs would need to take to be able to expand the 

audit trail to certain products or transactions? Should the Commission 

consider expansion to certain products or transactions before others? 

The Commission also requests comment on an appropriate and realistic 

time frame for including these other products and transactions in the 

consolidated audit trail and whether an expansion should be done in 

phases.

    The Commission also requests comment on whether implementation of 

the proposed Rule, which would apply to NMS securities, would have an 

impact on trading activity by market participants in products not 

initially covered by the proposed Rule. The proposed consolidated audit 

trail is designed to provide the SROs and the Commission a tool to more 

effectively, and in a more timely manner, identify potential 

manipulative or other illegal activity. More timely detection and 

investigation of such activity may lead to greater deterrence of future 

illegal activity if potential wrongdoers perceive a greater chance of 

regulators identifying their activity in a more timely fashion. Do 

commenters believe that the existence of the proposed audit trail would 

alter market participants' trading behavior, such as by shifting their 

trading to products or markets not covered by the proposed Rule to 

avoid detection of illegal activity using consolidated audit trail 

data? Would the proposal impact a market participant's analysis of the 

potential risks and benefits of manipulative activity involving NMS 

securities? If so, how so? In addition, to the extent commenters 

believe that market participants may alter their trading behavior, such 

as by shifting trading to products that are not initially covered by 

the proposed Rule to avoid detection of manipulative activity, the 

Commission requests comment on the importance of expanding the 

consolidated audit trail to cover additional products.



B. Orders and Quotations



    The proposed Rule would require that information be provided to the 

central repository for every order in an NMS security originated or 

received by a member of an exchange or FINRA. The proposed Rule would 

define ``order'' to mean: (1) Any order received by a member of a 

national securities exchange or national securities association from 

any person; (2) any order originated by a member of a national 

securities exchange or national securities association; or (3) any bid 

or offer.\174\ Thus, the proposed consolidated audit trail would cover 

all orders (whether for a customer or for a member's own account) as 

well as quotations in NMS stocks and listed options.\175\ Each member 

would be required to report to the central repository the origination 

of its own orders or quotations, and the SRO to which the member sends 

its orders and quotations would be required to report receipt and 

execution, if applicable, of those orders and quotations. Because the 

origination of the quotations would already be reported to the central 

repository by the member, an SRO would not be required to separately 

submit to the central repository its best bids and offers that it is 

required to submit to the central processors.\176\

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    \174\ See proposed Rule 613(j)(4). Bid or offer is defined in 

Rule 600(a)(8) of Regulation NMS to mean the bid price or the offer 

price communicated by a member of a national securities exchange or 

member of a national securities association to any broker or dealer, 

or to any customer, at which it is willing to buy or sell one or 

more round lots of an NMS security, as either principal or agent, 

but shall not include indications of interest. 17 CFR 242.600(a)(8).

    \175\ Quotation is defined in Rule 600(a)(62) of Regulation NMS 

to mean a bid or an offer. 17 CFR 242.600(a)(62).

    \176\ See Rule 601 of Regulation NMS, 17 CFR 242.601.

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    The Commission preliminarily believes that the inclusion of orders 

for a member's own account (``proprietary orders'') and their bids and 

offers in the scope of the consolidated audit trail is necessary and 

appropriate to effectively and efficiently carry out the stated 

objectives of the consolidated audit trail. The SROs would not be able 

to use the consolidated audit trail data to surveil trading by broker-

dealers through their proprietary accounts if that information is not 

included in the audit trail. Further, including proprietary orders and 

quotations in the consolidated audit trail would permit SROs to harness 

the intended benefits of the consolidated audit trail to more 

efficiently monitor for violations of SRO rules where the exact 

sequence of the receipt and execution of customers orders in relation 

to the creation and execution of proprietary orders or quotations is 

important to determine whether or not a violation occurred. For 

example, SROs would be able to use the consolidated audit trail data to 

more efficiently monitor for instances where a broker-dealer receives a 

customer order, then sends a proprietary order to one exchange or 

updates its quotations on an exchange prior to sending the customer 

order to another exchange, in possible violation of the trading ahead 

prohibitions in their rules.\177\

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    \177\ See, e.g., FINRA Rule 5320 and NYSE Arca Equities Rule 

6.16.

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    Another example where information on proprietary orders or 

quotations would be useful to have included in the consolidated audit 

trail is in the investigation of a possible ``spoofing'' allegation. In 

those cases, a market participant enters and may immediately cancel 

limit orders or quotations in a specific security with the intent of 

having those non-bona fide orders or quotations change the national 

best bid and national best offer (``NBBO''). Because a market 

participant could conduct this activity across multiple markets, using 

different accounts, the lack of consolidated data makes it much more 

difficult to identify the source of the orders or quotations and thus 

to determine whether the quoted price was manipulated or simply 

responding to market forces. The Commission therefore preliminarily 

believes that having information on proprietary orders and quotations 

in the consolidated audit trail along with customer order information 

would



[[Page 32571]]



greatly enhance the ability of the SROs to detect potentially violative 

activity.

    The Commission requests comment on its proposed definition of 

``order'' and the scope of the proposed consolidated audit trail. 

Specifically, the definition would include orders received and 

originated by SRO members, as well as quotations originated by SRO 

members. Should it include quotations? Why or why not? Are there any 

differences between orders and quotations that should be taken into 

account with respect to the information that would be required to be 

provided to the central repository with respect to each bid or offer, 

or with respect to how, or which entity, should be required to report 

quotation information to the central repository? For example, the 

Commission understands that out-of-the-money options generate a high 

volume of automated quotation updates to reflect changes in the price 

of the underlying security, yet these series often have very little 

trading activity. Should this type of quotation be required to be 

submitted to the central repository? If not, is there any way to 

distinguish these quotations from other quotations that commenters 

believe should be reported, such as quotations generated by a profit-

seeking algorithm? What is the magnitude of quotation data compared to 

order data and trade data, for both NMS stocks and listed options? 

Please provide any empirical data. Would there be a significant cost 

savings to the submission and collection of certain quotation 

information (for example, quotations in listed options) by end-of-day 

instead of in real time? If so, please quantify.

    The Commission also requests comment with respect to including 

proprietary orders as well as customer orders in the scope of the 

consolidated audit trail. Specifically, are there any differences 

between customer orders and proprietary orders that should be taken 

into account with respect to the information that would be required to 

be provided to the central repository with respect to proprietary 

orders? The Commission also requests comment on how, if at all, the 

consolidated audit trail should take into account instances where an 

SRO's quotations (which can include orders received from members as 

well as quotations) are not actionable, such as when an exchange has a 

systems failure. Should non-firm quotations be marked in the 

consolidated audit trail to show they are not firm? If so, how would 

that be accomplished where it is the exchange making the determination 

its quotations are not firm, not the member that submitted the order or 

quotation?



C. Persons Required To Provide Information to the Central Repository



    Proposed Rule 613 would require, through the mechanism of an NMS 

plan and exchange and association rules adopted pursuant to an NMS 

plan, national securities exchanges, national securities associations, 

and their respective members \178\ to provide certain information 

regarding each order and each reportable event \179\ to the central 

repository.\180\ The Commission notes that requiring all members to 

provide certain information would capture alternative trading systems 

(``ATSs'').\181\

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    \178\ A member of a national securities exchange is defined in 

Section 3(a)(3)(A) of the Exchange Act to mean: (1) Any natural 

person permitted to effect transactions on the floor of the exchange 

without the services of another person acting as broker; (2) any 

registered broker or dealer with which such a natural person is 

associated; (3) any registered broker or dealer permitted to 

designate as a representative such a natural person; and (4) any 

other registered broker or dealer which agrees to be regulated by 

such exchange and with respect to which the exchange undertakes to 

enforce compliance with the provisions of the Exchange Act, the 

rules and regulations thereunder, and its own rules. Further, for 

purposes of Sections 6(b)(1), 6(b)(4), 6(b)(6), 6(b)(7), 6(d), 

17(d), 19(d), 19(e), 19(g), 19(h), and 21 of the Exchange Act, the 

term ``member'' when used with respect to a national securities 

exchange also means, to the extent of the rules of the exchange 

specified by the Commission, any person required by the Commission 

to comply with such rules pursuant to Section 6(f) of this title. 

See 15 U.S.C. 78c(a)(3)(A).

    A member of a registered securities association is defined in 

Section 3(a)(3)(B) of the Exchange Act to mean any broker or dealer 

who agrees to be regulated by such association and with respect to 

whom the association undertakes to enforce compliance with the 

provisions of the Exchange Act, the rules and regulations 

thereunder, and its own rules. See Section 3(a)(3)(B) of the 

Exchange Act, 15 U.S.C. 78c(a)(3)(B). Section 15(b)(8) of the 

Exchange Act, 15 U.S.C. 78o(b)(8), states that it shall be unlawful 

for any registered broker or dealer to effect any transaction in, or 

induce or attempt to induce the purchase or sale of, any security 

(other than commercial paper, bankers' acceptances, or commercial 

bills), unless such broker or dealer is a member of a securities 

association registered pursuant to Section 15A of the Exchange Act 

or effects transactions in securities solely on a national 

securities exchange of which it is a member.

    Rule 15b9-1(a) under the Exchange Act, 17 CFR 240.15b9-1(a), 

generally states that any broker or dealer required by Section 

15(b)(8) of the Exchange Act to become a member of a registered 

national securities association shall be exempt from such 

requirement if it is a member of a national securities exchange; 

carries no customer accounts; and has annual gross income derived 

from purchases and sales of securities otherwise than on a national 

securities exchange of which it is a member in an amount no greater 

than $1,000.

    \179\ Reportable event would be defined in proposed Rule 

613(j)(5) to include, but not be limited to, the receipt, 

origination, modification, cancellation, routing, and execution (in 

whole or in part) of an order.

    \180\ See infra Section III.D. for a detailed discussion of the 

information that would be required to be provided to the central 

repository, and infra Section III.H.2. for a discussion of the 

requirement that the exchanges and FINRA adopt rules to implement 

the requirements of the NMS plan for their members.

    \181\ An ATS is defined in Rule 300(a) of Regulation ATS. See 17 

CFR 242.300(a). Regulation ATS requires ATSs to be registered as 

broker-dealers with the Commission, which entails becoming a member 

of FINRA and fully complying with the broker-dealer regulatory 

regime. See Concept Release on Equity Market Structure, supra note 

19, at 3599.

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    The Commission's intent is to require any entity acting in a broker 

or dealer capacity that would receive an order from a customer or 

originate an order for its own account to provide information to the 

central repository. The Commission requests comment on whether 

requiring all members of each exchange and association to provide the 

required information would encompass all broker or dealers or other 

persons that would receive or originate orders, as defined in the 

proposed Rule. If not, why not? The Commission requests comment on 

whether it should, in the alternative, require all brokers and dealers 

registered with the Commission to provide such information, rather than 

all members of an exchange or association. Would applying the 

requirements to registered brokers and dealers encompass all persons 

that would be able to receive or originate orders as defined in the 

proposed rule? Are there persons that are not registered as a broker or 

dealer, and that are not a member of an exchange or association, that 

would still receive or originate orders in NMS securities? How should 

the Commission address that situation to promote inclusion of all 

relevant orders and executions in a consolidated audit trail?



D. Provision of Information to the Central Repository



    Proposed Rule 613(c)(1) generally would require the NMS plan to 

provide for an accurate, time-sequenced record of orders beginning with 

the receipt or origination of an order by a member of a national 

securities exchange or national securities association, and further 

documenting the life of the order through the process of routing, 

modification, cancellation, and execution (in whole or in part). To 

effectuate this goal, proposed Rule 613(c)(2) would require the NMS 

plan to require each national securities exchange, national securities 

association, and member of such exchange or association to collect and 

provide to the central repository certain information with respect to 

orders in NMS securities.\182\

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    \182\ See Sections III.D.1. and III.D.2. below for a detailed 

discussion of the information that would be required to be provided 

to the central repository.



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[[Page 32572]]



    Specifically, the proposed Rule would require the NMS plan to 

require each national securities exchange and its members to collect 

and provide to the central repository certain order information for 

each NMS security registered or listed for trading on such exchange or 

admitted to unlisted trading privileges on such exchange.\183\ The 

proposed Rule also would require the NMS plan to require each national 

securities association and its members to collect and provide to the 

central repository certain order information for each NMS security for 

which transaction reports are required to be submitted to the 

association.\184\ The Commission requests comment on whether requiring 

exchanges and their members, and associations and their members, to 

report information for orders for these securities to a central 

repository is appropriate, and whether the requirements, as proposed, 

would cover all NMS securities.\185\

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    \183\ See proposed Rule 613(c)(5).

    \184\ See proposed Rule 613(c)(6).

    \185\ See infra Section III.F. for a discussion of the central 

repository.

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    As discussed below in Section III.D.1., certain of the information 

would be required to be captured and transmitted to the central 

repository on a real time basis, meaning immediately and with no built 

in delay from when the reportable event occurs.\186\ Other information 

would be permitted to be captured and transmitted to the central 

repository promptly after the exchange, association, or member receives 

the information, but in no instance later than midnight of the day that 

the reportable event occurs or the exchange, association, or member 

receives such information.\187\ The data collected by the national 

securities exchanges, national securities associations, and their 

members would be required to be electronically transmitted to the 

central repository in a uniform electronic format.\188\

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    \186\ See proposed Rule 613(c)(3). See supra note 179 for a 

definition of reportable event.

    \187\ See proposed Rule 613(c)(4). This requirement to report no 

later than midnight on the day that the reportable event occurs or 

the exchange, association or member receives the information would 

be determined using the local time of the entity reporting the 

information to the central repository.

    \188\ See proposed Rule 613(c)(2).

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1. Information To Be Provided to the Central Repository in Real Time

    As discussed above in Section II.A.4., the Commission preliminarily 

believes that requiring the submission of consolidated audit trail 

information on a real time basis would help enable more timely cross-

market monitoring or surveillance and investigations of, or other 

responses to, market anomalies. Regulators therefore could more easily 

and quickly identify manipulative or other undesirable activity. Having 

the information available in real time would allow the staff of the 

SROs to run certain cross-market surveillances in real time to 

ascertain whether anomalous trading activity is occurring, and the SROs 

could then more quickly begin an investigation into the suspected 

anomalous trading. Timely pursuit of potential violations can be 

important in seeking to freeze any profits received from illegal 

activity before they are spent or otherwise become unreachable (for 

instance, by being transferred out of the country). The Commission also 

preliminarily believes that requiring the submission of audit trail 

information in real time would enable the Commission to access the 

information on a more timely basis than currently is the case, to 

support its examination and enforcement activities, as well as its 

analysis of market activity.\189\

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    \189\ See supra notes 28, 154, and 171 and accompanying text.

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    The Commission requests comment as to whether it is feasible to 

require the submission of the proposed audit trail information, as 

detailed below, to the central repository on a real time basis. If the 

information is not submitted on a real time basis, when should the 

information be submitted to the central repository? Would real time 

order and execution information be useful for cross-market surveillance 

and investigations of market anomalies? If so, how? If not, why not? 

Please discuss the costs and benefits of recording and transmitting the 

data in real time, or not in real time. For example, how would costs 

differ between submitting end-of-day data compared to real time data? 

Are there categories of information that would be easier to produce on 

a real time basis than others? What types of systems modifications by 

the exchanges, FINRA, and their respective members would be necessary 

to collect and submit the required audit trail information to the 

central repository on a real time basis? Please respond with 

specificity. The Commission further requests comment on whether the 

requirement to report information in real time should be limited to a 

specific time period during the day, such as when the markets for 

trading NMS stocks and listed options are open for trading? Or some 

other time period? How much lower would the cost be to submit data in 

real time during trading hours than during the whole day? Or some other 

time period? Are there practical issues with requiring real time 

reporting throughout the day? Would requiring data to be submitted in 

real time all day, as proposed, allow the ability to perform systems 

maintenance if necessary? If commenters support the requirement to 

report information in real time, do they believe that there are times 

during the day when real time reporting may be unnecessary? Why or why 

not?

    Proposed Rule 613(c)(3) would require the NMS plan to require each 

exchange, association, and member to collect and provide to the central 

repository on a real time basis details for each order and each 

reportable event,\190\ as outlined below. Each exchange, association, 

or member would be required to report the information for each order, 

for each reportable event, only with respect to an action taken by the 

exchange, association, or member. For example, if a member receives an 

order from a customer, the member would be required to report the 

receipt of that order (with the required information) to the central 

repository. If the member then routed that order to an exchange for 

execution, the member would be required to report the routing of that 

order (with the required information) to the central repository. 

Likewise, the exchange would be required to report the receipt of that 

order from the member (with the required information) to the central 

repository. If the exchange executed the order on its trading 

system(s), the exchange would be required to report that execution of 

the order (with the required information) to the central repository, 

but the member would not also be required to report the execution of 

the order to the central repository. If the member executed the order 

in the over-the-counter market, however, rather than routing the order 

to an exchange (or other market center) for execution, the member would 

be required to report the execution of the order to the central 

repository.

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    \190\ See supra note 179 for a definition of reportable event.

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i. Customer Information

    The proposed Rule specifically would require, for the receipt or 

origination of each order, information to be reported to the central 

repository with respect to the customer that generates the order--

specifically, the beneficial owner(s) of the account originating the 

order and the person exercising investment discretion for the account 

originating the order, if different from the beneficial owner.\191\ As 

discussed above in Section



[[Page 32573]]



II.A.1, such information generally is neither required nor captured on 

existing audit trails. While Rule 17a-25 requires broker-dealers to 

electronically submit information about customer and proprietary 

securities trading, such information is required to be submitted to the 

Commission only upon request. The Commission preliminarily believes 

that the usefulness of audit trail information for purposes of 

effective enforcement and cross-market surveillance of trading activity 

would be greatly improved by having the identity of the customer 

electronically attached to the report of the receipt or origination of 

each order that is sent to the central repository.\192\

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    \191\ The proposed Rule would define ``customer'' to mean the 

beneficial owner(s) of the account originating the order and the 

person exercising investment discretion for the account originating 

the order, if different from the beneficial owner(s). See proposed 

Rule 613(j)(1). The Commission notes that this proposed definition 

of customer is only for purposes of proposed Rule 613, and what 

information would be required to be collected and disclosed by 

members to the central repository. The Commission does not intend to 

alter the responsibilities that broker-dealers are already subject 

to pursuant to SRO rules, or the federal securities laws, rules or 

regulations or other laws, with respect to the customers (for 

example, suitability rules, see, e.g. NASD Rule 2310).

    \192\ See supra Section II.A.

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    The proposed Rule would require that the NMS plan require, for the 

receipt or origination of an order, the provision to the central 

repository of information of sufficient detail to identify the 

customer.\193\ The Commission preliminarily believes that the customer 

name and address would be sufficient detail to identify the customer. 

In addition, the proposed Rule would require the provision of customer 

account information, which would be defined in proposed Rule 613(j)(2) 

to include but not be limited to: (1) The account number; (2) account 

type (e.g. options); (3) customer type (e.g., retail, mutual fund, 

broker-dealer proprietary); (4) the date the account was opened; and 

(5) the large trader identifier (if applicable).\194\ The Commission 

preliminarily believes that information on the type of account and when 

it was opened would be important to investigations of potential insider 

trading. For example, knowing when in time the customer opened the 

account in relation to the suspicious trading activity, or whether the 

customer changed account authorization to permit options trading just 

before suspicious options trading, could be evidence of intent. The 

Commission notes that currently any member receiving orders from a 

customer would be required, as part of its compliance with its books 

and records requirements,\195\ to take reasonable and appropriate steps 

to ensure the accuracy of the customer information received. This 

should not change, if this proposal were adopted, with respect to 

customer information recorded and provided to the central repository.

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    \193\ See proposed Rule 613(c)(7)(i)(A).

    \194\ See proposed Rule 613(c)(7)(i)(C). See also Large Trader 

Proposal, supra note 11.

    \195\ See, e.g., Rules 17a-3, 17a-4, and 17a-25 under the 

Exchange Act, 17 CFR 240.17a-3, 17a-4, and 17a-25.

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    The proposed Rule also would require a unique customer identifier 

for each customer.\196\ The unique customer identifier should remain 

constant for each customer, and have the same format, across all 

broker-dealers. This unique customer identifier would serve a similar 

purpose to a customer's social security number or tax identification 

number, obviating the need to include that information in the 

consolidated audit trail data. The Commission is not proposing to 

mandate the method for achieving this requirement, so as to allow those 

entities subject to the proposed Rule flexibility to determine the most 

practical way to accomplish the requirement of having unique customer 

identifiers. However, one alternative could be to have the central 

repository be responsible for assigning a unique customer identifier in 

response to an input by a member of a customer's social security number 

or tax identification number. If the customer already has been assigned 

a unique identifier because of a prior request by another member, the 

central repository would provide to the member that same identifier. If 

no unique identifier has previously been assigned, the central 

repository could assign a new one. Access to this part of the central 

repository's functionality could be more tightly controlled than access 

to the consolidated audit trail data, to help ensure the 

confidentiality of the social security or tax identification numbers.

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    \196\ See proposed Rule 613(c)(7)(i)(B).

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    The Commission requests comment as to whether each item of 

information regarding the customer is necessary for an effective 

consolidated audit trail. Is there any additional data that should be 

included to help identify the customer submitting the order? The 

Commission also requests comment on the proposed definition of 

customer. For example, should the definition only include the person 

exercising investment discretion? Should the definition include the 

beneficial owner? Should the customer information requirement also 

include a unique identifier for the particular computer algorithm used 

by the firm to generate the order, if applicable? Is there a better way 

to identify in the audit trail individual algorithmically-generated 

trading strategies? Should each trading desk at a member be required to 

have its own unique customer identifier, to the extent the trading desk 

is originating orders for the account of the member? This information 

on specific algorithms or trading desks could be useful to focus an 

inspection or investigation, if regulators could tell from the audit 

trail data that there was a pattern of suspicious trading activity from 

a specific algorithm or desk.

    The Commission requests comment as to what systems modifications, 

if any, would be required for members to collect and to provide this 

customer identification information to the central repository. Do 

broker-dealers currently keep this information electronically? If not, 

what changes would need to be made to collect and provide this 

information for existing accounts to the central repository? What would 

be the cost of converting this information into an electronic, 

accessible and linked format? Please be specific in your response. 

Further, the Commission requests comment on whether there are laws or 

other regulations in non-U.S. jurisdictions that would limit or 

prohibit a member from obtaining the proposed customer information for 

non-U.S. customers. If so, what are they? How do members currently 

obtain such information for such customers? If there are special 

difficulties in obtaining customer information from non-US 

jurisdictions, how should the consolidated audit trail be modified or 

otherwise reflect that difficulty?

    The Commission requests comment on other possible ways to develop 

and implement unique customer identifiers. For example, who should be 

responsible for generating the identifier? The Commission also requests 

comment on whether a unique customer identifier, together with the 

other information with respect to the customer that would be required 

to be provided under the proposed Rule, is sufficient to identify 

individual customers. Are there any concerns about how the customer 

information will be protected? If so, what steps should be taken to 

ensure appropriate safeguards with respect to the submission of 

customer information, as well as the receipt, consolidation, and 

maintenance of such information in the central repository.

    In addition, the Commission requests comment on whether the 

requirement to provide customer information to the central repository 

in real time would impact market participants' trading activity? If so, 

how so? For example, would market participants be hesitant to



[[Page 32574]]



engage in certain legal trading activity because of a concern about 

providing customer information in real time? Would market participants 

shift their trading activity to products or markets that do not require 

the capture of customer information to avoid compliance with this 

requirement of the proposed Rule? If so, how should the Commission 

address those concerns? On the other hand, would enhanced surveillance 

of the markets as a result of the consolidated audit trail attract 

additional trading volume to the U.S. markets?

ii. National Securities Exchange, National Securities Association and 

Broker-Dealer Identifier Information

    Each member originating or receiving an order from a customer, and 

each national securities exchange, national securities association, and 

member that subsequently handles the order, would be required to 

include its own unique identifier in each report it sends to the 

central repository for a reportable event. Such an identifier would 

allow the Commission and SRO staff to determine which member 

facilitated the transaction and assist in assessing compliance with 

various SRO or Commission rules, such as the limit order display rule 

(Rule 604 of Regulation NMS).\197\ This is especially important for 

ensuring that individual customer orders are handled and executed in 

accordance with SRO and Commission rules. In addition, routing 

decisions are an important aspect in assessing order execution quality 

and compliance with a member's duty of best execution. Further, if 

applicable, the member receiving an order from a customer would be 

required to report an identifier specifying the branch office and the 

registered representative at the member receiving the order. These 

identifiers would be unique to the exchange, association, member, 

branch office, and registered representative.

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    \197\ 17 CFR 242.604.

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    The proposed Rule would not require that these unique identifiers 

``travel'' with an order throughout its life, but would require that 

the unique identifier of each member or SRO that is taking an action 

with respect to the order be attached to the report of each reportable 

event that the member, exchange or association is reporting to the 

central repository. Each report in the life of the order would be able 

to be linked together at the central repository through the unique 

order identifier. Therefore, the Commission preliminarily does not 

believe that the unique identifier of each member or market that 

touches an order needs to travel with the order for the life of the 

order as long as the unique identifier of the member or exchange taking 

the action is included. For example, if Member A receives an order from 

a customer, Member A would be required to report the receipt of that 

order to the central repository and include Member A's unique 

identifier. If Member A then routed that order to another member, 

Member B, Member A would be required to report the routing of that 

order to the central repository and include Member A's unique 

identifier as well as the unique identifier of Member B. Likewise, 

Member B would be required to report the receipt of that order from 

Member A to the central repository and include the unique identifiers 

of Member A and Member B. If Member B then routed the order to Exchange 

A for execution, Member B would be required to report the routing of 

the order to the central repository and include the unique identifier 

of Member B and Exchange A, but not Member A.

    The Commission requests comment as to who should be responsible for 

generating unique identifiers for national securities exchanges, 

national securities associations, and their members. Would it be 

feasible for each national securities exchange, national securities 

association, or member to develop its own identifier for this purpose? 

The Commission also requests comment on the level of specificity for 

each unique member identifier--should it be designed to identify the 

firm, trading desk or individual registered representative? What are 

the advantages or disadvantages of requiring a unique identifier that 

would allow identification of an individual registered representative 

as opposed to just the member entity? The Commission also requests 

comment on procedures or safeguards market participants believe are 

necessary or appropriate so that these unique identifiers are routed 

accurately.

iii. Receipt or Origination of an Order

    The proposed Rule would require the NMS plan to require members of 

each of the exchanges and FINRA to collect and provide to the central 

repository certain key items of information about an order as soon as 

the member receives or originates an order, including the customer 

information as described above. The proposed Rule would require the 

member to report the date and time (to the millisecond) that an order 

was originated or received.\198\ The member also would be required to 

report the material terms of the order.\199\ Material terms of the 

order would be defined to include, but not be limited to, the following 

information: (1) The NMS security symbol; (2) the type of security; (3) 

price(s) (if applicable); (4) size (displayed and non-displayed); (5) 

side (buy/sell); (6) order type; (7) if a sell order, whether the order 

is long, short, or short exempt;\200\ (8) if a short sale, the locate 

identifier; (9) open/close indicator; (10) time in force (if 

applicable); (11) whether the order is solicited or unsolicited; (12) 

whether the account has a prior position in the security; (13) if the 

order is for a listed option, option type (put/call), option symbol or 

root symbol, underlying symbol, strike price, expiration date, and 

open/close; and (14) any special handling instructions.\201\

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    \198\ See proposed Rule 613(c)(7)(i)(H). Requiring time to the 

millisecond is consistent with current industry standards. The SIPs 

currently support millisecond time stamps. See, e.g. SIAC's CQS 

Output Specifications Revision 40 (January 11, 2010); SIAC's CTS 

Output Specifications Revision 55 (January 11, 2010); and Nasdaq's 

UTP Plan Quotation Data Feed Interface Specifications Version 12.0a 

(November 9, 2009).

    \199\ See proposed Rule 613(c)(7)(i)(I).

    \200\ A broker or dealer must mark all sell orders of any equity 

security as long, short, or short exempt. See Rule 200(g)(1) under 

the Exchange Act, 17 CFR 242.200(g)(1). A sell order may be marked 

short exempt only if the conditions of Rule 201(c) or (d) under the 

Exchange Act are met (17 CFR 242.201(c) and (d)). See Rule 

200(g)(2), 17 CFR 242.200(g)(2).

    \201\ See proposed Rule 613(j)(3).

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    The information described would assist the SROs, and the Commission 

as well, in determining the exact time of order receipt or origination, 

as well as provide a record of all of the original material terms of an 

order. The entry time of orders can be critical information in 

enforcement cases. In insider trading investigations, for example, the 

entry time of the order may be a critical piece of evidence in 

determining whether or not an individual acted with the requisite 

scienter to violate the federal securities laws. Similarly, in 

investigating possible market abuse violations, such as trading ahead 

of a customer order, the relationship between order origination, the 

terms of the order, and order entry of various other orders on multiple 

venues, may be at issue. As noted above, requiring that the time of a 

reportable event be reported in milliseconds is consistent with current 

industry standards. The Commission requests comment on whether this is 

an appropriate time standard. Do commenters believe that the time 

standard should be shorter? If so, what should be the standard, and 

why? Would requiring a shorter time standard for reporting actually 

provide more



[[Page 32575]]



precision in the timing of events? How would your answer be impacted by 

the extent to which market participants' clocks are synchronized? 

Alternatively, do commenters believe that it would be more appropriate 

to require in the proposed Rule that the time of reporting be 

consistent with industry standards, rather than including a specific 

time standard (recognizing that the SROs could choose to include a 

specific time standard in the NMS plan)?

    An open/close indicator currently is required to be submitted to 

exchanges for listed option orders \202\ and indicates whether the 

trade is opening a new position or increasing an existing position 

rather than closing or decreasing an existing position. The open/close 

indicator provides information to more easily track the size and 

holding time for individual positions, and thus to more easily track 

open interest and short interest. In addition, an open/close indicator 

could be used to indicate when a buy order in a stock is a buy to cover 

on a short sale. This information is useful in investigating short 

selling abuses and short squeezes. For example, a build up of a large 

short position by one investor along with the spreading of rumors may 

be indicative of using short selling as a tool to potentially 

manipulate prices. Information on when the position decreases is also 

useful for indicating potential manipulation, insider trading, or other 

rule violations. Information on whether the account has a prior 

position in the security is useful in a number of investigations. For 

example, the ability to easily determine whether an order adds to a 

position, along with the timing of the order, is particularly important 

in detecting and investigating portfolio pumping or marking the close. 

Also, information on whether the account has a prior position may be 

important in investigating ``layering'' or ``spoofing.'' Layering and 

spoofing are manipulations where orders are placed close to the best 

buy or sell price with no intention to trade in an effort to falsely 

overstate the liquidity in a security.

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    \202\ See, e.g., CBOE Rule 6.51; BATS Rule 20.7; and ISE Rule 

1404.

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    The Commission intends that the items of information required to be 

reported to the central repository for the receipt or origination of an 

order, at a minimum, include substantially all of the information 

currently required to be reported, or provided upon request, under the 

exchanges' and FINRA's existing order audit trail rules, as well as the 

EBS system rules and Rule 17a-25 under the Exchange Act. The Commission 

requests comment as to whether there are any items of information that 

are required to be recorded and reported by existing audit trail rules, 

or to be provided to the SROs or Commission upon request, that are not 

included within the proposed Rule that commenters believe should be 

included. If there are, please identify each item of information and 

discuss why you believe that such information should be included in the 

proposed consolidated audit trail. The Commission also requests comment 

on whether there are items of information included in the current SRO 

audit trails, and which are proposed to be included in the consolidated 

audit trail, that are unnecessary for surveillance, investigative or 

other regulatory purposes. If so, what are these data elements and why 

are they not necessary as part of a consolidated audit trail? Are they 

relevant for other purposes? The Commission further requests comment on 

whether it should require, as part of the disclosure of special 

handling instructions, the disclosure of an individual algorithm that 

may be used by a member or customer to originate or execute an order, 

and if so, how such an algorithm should be identified.

    As noted above, members currently are required to indicate whether 

an order would open or close a position for listed options.\203\ The 

Commission requests comment as to what extent members currently obtain 

or have access to this information from their customers, or track this 

information for their own proprietary orders, for all NMS securities. 

If members currently do obtain this information, is the information 

collected and stored electronically? If members currently do not have 

access to or obtain this information for customer orders, what would be 

the impact of the proposed requirement to collect and provide this 

information to the central repository? What would be the costs, if any, 

of collecting and providing this information? Please explain and 

quantify any potential impact or costs.

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    \203\ Id.

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    The proposed Rule does not specify exact order types (e.g., market, 

limit, stop, pegged, stop limit) to be included as material terms of an 

order because order types may differ across markets, and even an order 

type with the same title may have a different meaning from one exchange 

to another. Further, markets are frequently creating new order types 

and eliminating existing order types. In addition, the Commission notes 

that it may be difficult to distinguish between an ``order type'' and a 

special handling instruction, such as ``do not display.'' The 

Commission therefore preliminarily believes that it would not be 

practical to include in the proposed Rule a list of order types in the 

required information to be reported to the central repository. The 

Commission notes, however, that the SROs may choose to include more 

detail in the NMS plan. The Commission requests comment on this 

approach. The Commission also requests comment as to whether there are 

other items of information that would be required to be reported to the 

central repository that have, or may have, different meanings across 

different exchanges. If so, what are they? How should these differences 

be addressed in the proposed Rule?

    The proposed Rule also would require the NMS plan to 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 and that would stay with that order 

throughout its life, including routing, modification, execution, and 

cancellation.\204\ The members, exchanges, and FINRA would be required 

to pass along the unique order identifier with the order when routing 

the order, and the unique order identifier would be required on each 

reportable event report. For example, Member ABC that receives an order 

from a customer would immediately assign it a unique order identifier, 

and would report that identifier to the central repository along with 

the rest of the required information. If Member ABC subsequently routed 

the order to another member, Member DEF, Member ABC would be required 

to pass along to Member DEF the unique order identifier, as well as to 

attach the unique order identifier when reporting the routing of the 

order to the central repository. If Member DEF routed the order to 

Exchange A for execution, Member DEF would pass along to Exchange A 

with the order the unique order identifier, and would attach the 

identifier on the report of the route sent to the central repository. 

Exchange A would be required to attach the unique order identifier when 

reporting receipt of the order, and an execution of the order (if 

applicable) to the central repository.

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    \204\ See proposed Rule 613(c)(7)(i)(D).

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    The Commission recognizes that the reality of how orders are routed 

and executed often is complex, and that it likely is not feasible to 

anticipate how the proposed requirement for a unique



[[Page 32576]]



order identifier would or would not apply to each different factual 

scenario. For example, members may often execute customer orders on a 

``riskless principal'' basis,\205\ rather than on an agency basis. The 

Commission preliminarily believes that it would not be practical or 

feasible to ``link'' through related unique order identifiers the 

customer order(s) and the member's proprietary order(s) from which the 

customer order is given an allocation. Rather, the Commission envisions 

that the member would create a new unique order identifier for each 

proprietary order, and that the manner in which the execution of the 

customer order would be ``linked'' with one (or more) proprietary 

order(s) (if at all) would be through the inclusion of the unique order 

identifier for the contra-side order(s) on the report of the execution 

of the customer order sent to the central repository.\206\ However, in 

a situation where a member merely broke up a larger customer order into 

smaller orders and sent those orders, on an agency basis, to multiple 

markets for execution, the Commission preliminarily believes that the 

unique order identifier of the original customer order should carry 

through in some manner to the individual smaller orders that result 

when the original order is broken up. For example, it may be necessary 

to attach two unique order identifiers to an order--the original order 

identifier (i.e. parent order) and the individual smaller order 

identifier (i.e. child order). Alternatively, the unique order 

identifier of the parent order could be modified to carry through to 

the child orders (for example, the parent order could have an 

identifier ABC and the child orders could have identifiers of ABC1 and 

ABC2).

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    \205\ For example, a member receives a customer order, and 

rather than sending the customer order as an agency order to an 

exchange or other marketplace to execute, the member creates an 

order for its proprietary account that it sends to an exchange or 

other marketplace to be executed. Once an execution occurs in the 

proprietary account, the member would then execute the customer 

order against its proprietary account. This process can be 

complicated by the member receiving and handling more than one 

customer order at a time, and creating one or more proprietary 

orders to send to one or more markets, and the manner in which the 

member allocates executions from its proprietary account among the 

customer orders.

    \206\ See proposed Rule 613(c)(7)(vi)(C).

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    The Commission preliminarily believes that a unique order 

identifier that is essentially transferred along with an order from 

origination through execution or cancellation is useful for a 

consolidated audit trail. The use of such an identifier would allow the 

SROs and the Commission to efficiently link all events in the life of 

an order and help create a complete audit trail across markets and 

broker-dealers that handle the order. In this manner, being able to 

link the parent order with the child orders through the unique order 

identifiers would allow for ease of tracking of the original parent 

order throughout its life. While the Commission believes that a unique 

order identifier is an important data element for the consolidated 

audit trail, the Commission is not proposing at this time to mandate 

the format of such an identifier or how the identifier would be 

generated.

    The Commission requests comment on whether, and why, a unique order 

identifier that would stay with the order for the life of the order is 

useful or essential for an effective consolidated audit trail. In 

addition, the Commission requests comment on whether there is an 

alternative to a unique order identifier that would stay with the order 

for the life of the order. For example, would permitting each member or 

SRO that receives an order from another member or SRO to attach its own 

unique identifier to an order allow the SROs to efficiently link all 

events in the life an order and ensure the creation of a complete audit 

trail across each market and broker-dealer that handled the order? The 

Commission requests comment on the feasibility and merits of the manner 

in which it proposes unique order identifiers be handled for riskless 

principal transactions. The Commission also requests comment on the 

feasibility and merits of requiring that a unique order identifier be 

attached to an order, as well as the multiple orders that may result if 

the original order is subsequently broken up into several orders, in a 

manner that would permit regulators to trace the subsequent orders back 

to the original single order. The Commission also requests comment on 

the feasibility and merits of requiring that a unique order identifier 

be attached to an order that is the result of a combination of two more 

orders in a manner that would permit regulators to trace the combined 

order back to its component orders. The Commission further requests 

comment as to how unique order identifiers could be generated for both 

electronic and manual orders, and who should be responsible for 

generating them. Given the significant number of orders (including 

quotations) for which information would be required to be collected and 

provided to the central repository pursuant to the proposed Rule, the 

Commission requests comment on the feasibility of allowing unique order 

identifiers to be re-used. If unique order identifiers were to be re-

used, at what point should that be allowed? Are there any concerns with 

re-use that should be addressed? Additionally, the Commission requests 

comment on whether it is feasible to require unique order identifiers 

if the consolidated audit trail is implemented in the proposed phased 

approach? For example, is it appropriate to require that national 

securities exchanges and national securities associations comply with 

this requirement before their members are required to do so?

    The Commission also requests comment on procedures or safeguards 

market participants may wish to establish to ensure that unique order 

identifiers are routed and reported accurately. Further, the Commission 

requests comment on what systems modifications, if any, would be 

required in order to ``tag'' every order with a unique order 

identifier. Please respond to each question with specificity.

iv. Routing

    The proposed Rule would require that the NMS plan require the 

collection and reporting to the central repository of all material 

information related to the routing of an order. Specifically, the 

proposed Rule would require the reporting of the following information 

each time an order is routed by the member or SRO that is doing the 

routing: (1) The unique order identifier; (2) the date on which an 

order was routed; (3) the exact time (in milliseconds) the order was 

routed; (4) the unique identifier of the broker-dealer or national 

securities exchange that routes the order; (5) the unique identifier of 

the broker-dealer or national securities exchange that receives the 

order; (6) the identity and nature of the department or desk to which 

an order is routed if a broker-dealer routes the order internally; 

\207\ and (7) the material terms of the order.\208\

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    \207\ Internal routing information can be a critical element in 

assessing whether a member may be disadvantaging customer orders, 

either by trading ahead of customer orders, or by executing orders 

as principal at prices inferior to the NBBO.

    \208\ See proposed Rule 613(c)(7)(ii).

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    Further, the proposed Rule would require the collection and 

reporting by the SRO or member receiving an order of the following 

information each time a routed order is received: (1) The unique order 

identifier; (2) the date on which the order is received; (3) the time 

at which the order is received (in milliseconds); (4) the unique 

identifier of the broker-dealer or national securities exchange 

receiving the order; (5) the unique identifier of the broker-



[[Page 32577]]



dealer or national securities exchange routing the order; and (6) the 

material terms of the order.\209\

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    \209\ See proposed Rule 613(c)(7)(iii).

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    This information would allow regulatory staff to easily identify 

each member or exchange that ``touches'' the order during its life, as 

well as the dates and times at which each member or exchange receives 

and reroutes the order, and any changes that may be made to the 

original terms of the order along the way. The Commission preliminarily 

believes that this information for orders that are routed would allow 

the Commission and SROs to efficiently track an order from inception 

through cancellation or execution.

    The Commission requests comment as to whether such information 

regarding the routing of orders is useful or necessary for an effective 

consolidated audit trail. Should any additional information be included 

in the consolidated audit trail relating to routing? The Commission 

requests comment as to what systems modifications, if any, would be 

required to provide this information. Do members currently have, or 

have access to, this information? If not, what changes would need to be 

made to collect this information for existing accounts for submission 

to the central repository? Do commenters believe that it would be 

necessary to achieve the purposes of the proposed Rule to require 

information from each member or SRO that ``touches'' an order? Please 

explain with specificity why or why not. Is it feasible to require 

information relating to the routing of orders if the consolidated audit 

trail is implemented in the proposed phased approach? For example, is 

it appropriate to require that national securities exchanges and 

national securities associations comply with this requirement before 

their members are required to do so?

v. Modification, Cancellation, and Execution

    The proposed Rule would require the NMS plan to require that 

information be reported to the central repository concerning any 

modifications to the material terms of an order or partial or full 

order cancellations. The national securities exchange, national 

securities association, or member handling the order at the time would 

be required to immediately report to the central repository the 

following information: (1) The unique order identifier, (2) the date 

and time (in milliseconds) that an order modification or cancellation 

was originated or received; (3) the identity of the person responsible 

for the modification or cancellation instruction; (4) the price and 

remaining size of the order, if modified; and (5) other modifications 

to the material terms of the order.\210\ Information pertaining to 

order modifications and cancellations would assist the Commission and 

SROs in identifying all changes made to an order and the persons and 

broker-dealers responsible for the changes.

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    \210\ See proposed Rule 613(c)(7)(iv).

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    The proposed Rule also would require the following information on 

full or partial executions of orders to be collected and reported to 

the central repository: (1) The unique order identifier; (2) the 

execution date; (3) the time of execution (in milliseconds); (4) the 

capacity of the entity executing the order (whether principal, agency, 

or riskless principal); (5) the execution price; (6) the size of the 

execution; (7) the unique identifier of the national securities 

exchange or broker-dealer executing the order; \211\ and (8) whether 

the execution was reported pursuant to an effective transaction 

reporting plan or pursuant to the OPRA Plan, and the time of such 

report.\212\

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    \211\ Each national securities exchange and national securities 

association would have its own unique identifier, as well as each 

broker-dealer (member) (see supra Section III.D.1.ii.).

    \212\ See proposed Rule 613(c)(7)(v).

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    The Commission preliminarily believes that the required execution 

information, in combination with the proposed information pertaining to 

order receipt or origination, modification, or cancellation, would 

provide regulators with a comprehensive, near real time view of all 

stages and all participants in the life of an order. The proposed Rule 

would allow the Commission and SROs to identify, for a particular 

transaction, every member and national securities exchange involved in 

the receipt or origination, routing, modification, and execution (or 

cancellation) of the order. This order information, including the 

readily accessible customer information, should help regulators 

investigate suspicious trading activity in a more timely manner than 

currently possible.

    Additionally, the requirement to report whether and when the 

execution of the order was reported to the consolidated tape \213\ 

should allow regulators to more efficiently evaluate certain trading 

activity. For example, trading patterns of reported and unreported 

transactions may cause the staff of an SRO or the Commission to make 

further inquiry into the nature of the trading to determine whether the 

public was receiving accurate and timely information regarding 

executions and that market participants were continuing to comply with 

the trade reporting obligations under SRO rules. Similarly, patterns of 

reported and unreported transactions could be indicia of market abuse, 

including failure to obtain best execution for customer orders or 

possible market manipulation. Being able to more efficiently compare 

the consolidated order execution data with the trades reported to the 

consolidated tape could thus be an important component of overall 

surveillance activity.

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    \213\ Id. See also infra Section III.F.1. for a discussion of 

the requirement in proposed Rule 613(e)(5) that the NMS plan require 

the central repository to receive and retain on a current and 

continuing basis (i) the national best bid and national best offer 

for each NMS security, (ii) transaction reports reported pursuant to 

a transaction reporting plan filed with the Commission pursuant to, 

and meeting the requirements of, Rule 601 of Regulation NMS, and 

(iii) last sale reports reported pursuant to the OPRA Plan.

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    As discussed above, the Commission recognizes that the execution of 

orders often is complex.\214\ For example, a customer order may be 

executed on a riskless principal basis. When a member receives a 

customer order, rather then sending the customer order as an agency 

order to an exchange or other marketplace for execution, the member 

creates an order for its proprietary account that it sends to an 

exchange or other marketplace to be executed. Once an execution occurs 

in the proprietary account, the member would then execute the customer 

order against its proprietary account. This process can be complicated 

by the member receiving and handling more than one customer order at a 

time, and creating one or more proprietary orders to send to one or 

more markets, and the manner in which the member allocates executions 

from its proprietary account among the customer orders. Each 

proprietary order would have a unique order identifier that is 

different from, and not linked to, the unique order identifier for the 

original customer order. How should the reporting to the central 

repository of the execution of the proprietary orders and the customer 

order be handled? As noted above, the Commission envisions that the 

manner in which the execution of the customer order would be ``linked'' 

with one (or more) of the proprietary order(s) would be through the 

inclusion of the unique order identifier for the contra-side order(s) 

on the report of the execution of the customer order sent to



[[Page 32578]]



the central repository.\215\ Is this practical? Is there another method 

by which to link the execution of the customer order to the proprietary 

orders? Is it necessary to do so to achieve the purposes of the 

consolidated audit trail?

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    \214\ See supra notes 205-206 and accompanying text.

    \215\ See supra note 206 and accompanying text.

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    The Commission requests comment on whether the information proposed 

to be collected and reported would be sufficient to create a complete 

and accurate audit trail. Is there additional information that should 

be collected and reported? If yes, please describe the information and 

the value its collection and reporting would add to the consolidated 

audit trail.

2. Information To Be Collected Other Than in Real Time

    While the majority of order and execution information would be 

required to be transmitted to the central repository on a real time 

basis, the Commission recognizes that this may not be practical or 

feasible for all information because the information may not be known 

at the time of the reportable event.\216\ Thus, the Commission is 

proposing that certain information be transmitted to the central 

repository promptly after the national securities exchange, national 

securities association, or member receives the information, but in no 

instance later than midnight of the day that the reportable event 

occurs or the national securities exchange, national securities 

association, or member receives such information.\217\ The Commission 

preliminarily believes that this proposed time frame would provide 

sufficient time for an exchange, association, or a member to obtain the 

information required to be reported while still allowing regulators to 

access the information for regulatory purposes on a more timely basis 

than today.

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    \216\ For example, a member may receive an order during the day 

from an advisory customer but not know to which sub-accounts to 

allocate execution of the order until later in the day.

    \217\ See proposed Rule 613(c)(4).

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    Each national securities exchange, national securities association 

and their members would be required to report the account number for 

any subaccounts to which an execution is allocated.\218\ By requiring 

that this data be included in the consolidated audit trail, regulators 

would be able to more easily identify the ``ultimate'' customer for the 

trade. The Commission preliminarily believes that it would be useful to 

know the account number as well as the required information on the 

beneficial owner. For example, a person or groups of persons could 

trade through a single account or numerous accounts. Because individual 

traders may use multiple accounts at multiple broker-dealers, being 

able to identify the beneficial owner of the underlying accounts aids 

in the identification and investigation of suspicious trading activity. 

Similarly, traders may seek to hide manipulative activity from 

regulatory oversight by trading anonymously through omnibus accounts. 

In those instances, linking the trade to the individual trader requires 

the market center to be able to identify both the accounts trading and 

the beneficial owner or owners of those accounts to determine what 

person or group of persons is directing the specific trades at issue. 

Requiring the identity of the ultimate customer electronically to be 

attached to each order would make this information easily accessible 

and searchable and thus would greatly improve the usefulness of audit 

trail information for purposes of effective enforcement and cross-

market surveillance.

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    \218\ See proposed Rule 613(c)(7)(vi)(A).

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    Each national securities exchange, national securities association 

and their members also would be required to report the unique 

identifier of the clearing broker or prime broker for the transaction, 

if applicable, and the unique order identifier of any contra-side 

order.\219\ Finally, if the execution is cancelled, a cancelled trade 

indicator would be required to be reported. In addition, the proposed 

Rule also would require the reporting of any special settlement terms 

for the execution, if applicable; short sale borrower information and 

identifier; and the amount of a commission, if any, paid by the 

customer, and the unique identifier of the broker-dealer(s) to whom the 

commission is paid.\220\

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    \219\ See proposed Rule 613(c)(7)(vi)(B) and (C).

    \220\ See proposed Rule 613(c)(7)(vi)(D), (E), and (F).

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    Broker-dealers have a duty of best execution.\221\ Since 

commissions can be charged either explicitly through a separate fee or 

implicitly in the transaction price, the lack of easily accessible 

commission fee data alongside transaction price data may make it hard 

to identify the ``all-in'' price of execution and, thus, hard to 

determine whether the obligation to seek best execution was met.\222\ 

In addition, broker-dealers also must comply with just and equitable 

principles of trade under NASD rules that require them to charge fair 

commissions and mark-ups (mark-downs), and the lack of easily 

accessible commission fee data may make it hard to determine whether 

just and equitable principles of trade have been observed.\223\ Also, 

FINRA rules prohibit certain quid pro quo arrangements in the 

distribution of IPOs.\224\

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    \221\ A broker-dealer has a legal duty to seek to obtain best 

execution of customer orders. See, e.g., Newton v. Merrill, Lynch, 

Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269-70, 274 (3d Cir.), 

cert. denied, 525 U.S. 811 (1998); Certain Market Making Activities 

on Nasdaq, Securities Exchange Act Release No. 40900 (Jan. 11, 1999) 

(settled case) (citing Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971); 

Arleen Hughes, 27 SEC 629, 636 (1948), aff'd sub nom. Hughes v. SEC, 

174 F.2d 969 (D.C. Cir. 1949)). See also Order Execution 

Obligations, Securities Exchange Act Release No. 37619A (Sept. 6, 

1996), 61 FR 48290 (Sept. 12, 1996) (``Order Handling Rules 

Release''). A broker-dealer's duty of best execution derives from 

common law agency principles and fiduciary obligations, and is 

incorporated in SRO rules and, through judicial and Commission 

decisions, the antifraud provisions of the federal securities laws. 

See Order Handling Rules Release, 61 FR at 48322. See also Newton, 

135 F.3d at 270. The duty of best execution requires broker-dealers 

to execute customers' trades at the most favorable terms reasonably 

available under the circumstances, i.e., at the best reasonably 

available price. Newton, 135 F.3d at 270. Newton also noted certain 

factors relevant to best execution--order size, trading 

characteristics of the security, speed of execution, clearing costs, 

and the cost and difficulty of executing an order in a particular 

market. Id. at 270 n.2 (citing Payment for Order Flow, Exchange Act 

Release No. 33026 (Oct. 6, 1993), 58 FR 52934, 52937-38 (Oct. 13, 

1993) (Proposed Rules)). See In re E.F. Hutton & Co., Securities 

Exchange Act Release No. 25887 (July 6, 1988). See also Securities 

Exchange Act Release No. 34902 (October 27, 1994), 59 FR 55006, 

55008-55009 (November 2, 1994) (``Approval of Payment for Order Flow 

Final Rules''). See also Securities Exchange Act Release No. 51808 

(June 9, 2005), 70 FR 37496 (June 29, 2005) (``NMS Adopting 

Release''), at 37537 (discussing the duty of best execution).

    \222\ The term ``all-in'' price is intended to capture the total 

costs for executing a trade.

    \223\ See FINRA Rule 2010 and IM-2440-1.

    \224\ See FINRA Rule 5130. The Rule ensures that: (1) FINRA 

members make bona fide public offerings of securities at the 

offering price; (2) members do not withhold securities in a public 

offering for their own benefit or use such securities to reward 

persons who are in a position to direct future business to members; 

and (3) industry insiders, including FINRA members and their 

associated persons, do not take advantage of their insider position 

to purchase ``new issues'' for their own benefit at the expense of 

public customers. For example, information on commissions could help 

detect a transaction in the secondary market between an underwriter 

and an investor at an excessively high commission rate that is a 

``quid pro quo'' for the underwriter allocating shares in a ``hot'' 

IPO to the investor.

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    The Commission requests comment on the usefulness and necessity of 

requiring the reporting of each of these items of information to 

achieve the stated objectives of the consolidated audit trail. Are 

there practical difficulties associated with providing this information 

as proposed? Is there additional information that would be useful or 

necessary in this regard? For example, the proposed Rule would require 

the reporting of a cancelled trade indicator, for executions that are 

cancelled. Should the proposed Rule



[[Page 32579]]



require separate identification of trades that are broken pursuant to 

the rules of the applicable SRO at the request of one party to a 

transaction or upon the SRO's own motion, and trades that are cancelled 

by mutual agreement of the parties? Why or why not? The Commission also 

requests comment on whether the proposed requirement to report the 

identity of the clearing broker would provide sufficient information on 

``give-up'' arrangements,\225\ or whether additional information should 

be required to be reported.

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    \225\ In a typical give-up arrangement, a broker-dealer that is 

not a member of an exchange (Broker-dealer A) may route the order to 

another broker-dealer that is a member of an exchange (Broker-dealer 

B) for execution on that exchange. If Broker-dealer B is not also a 

clearing member of the exchange, it may ``give-up'' the execution of 

that order to another broker-dealer that is a clearing member of 

that exchange (Broker-dealer C). Further, there may be a 

corresponding ``flip'' of the trade from Broker-dealer C's account 

to the account of the broker-dealer that is the clearing firm for 

Broker-dealer A.

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    The Commission requests comment on the proposed time frame for 

reporting of this information. The Commission is proposing that the 

information not required to be reported in real time be reported 

promptly after receipt, but in no event later than midnight on the day 

the reportable event occurs or the exchange, association, or member 

receives the information. While one of the objectives of the proposed 

Rule is to collect data on a real time basis, the Commission 

understands that certain information may not be available at the time 

of the reportable event (e.g., the execution or cancellation). The 

Commission, however, believes such information should be provided 

promptly after receipt, meaning as soon as possible given the 

capabilities of a market participant's systems. While the Commission is 

proposing that the information be reported promptly, the proposed Rule 

also would provide an objective time limit for providing the 

information--no later than midnight on the day the event occurs or the 

information is received by the exchange, association, or member. Is the 

proposed time frame reasonable with respect to the information that 

would be required to be reported? Should the proposed Rule only require 

that information be reported promptly after receipt? How should 

promptly be measured? Alternatively, should the proposed Rule only 

require that information not available at the time the reportable event 

occurs be reported no later than midnight on the day the information 

was received? How would this standard impact the usefulness of the 

consolidated audit trail?



E. Clock Synchronization



    The Commission believes that clock synchronization is necessary to 

ensure an accurate audit trail, given the number of market participants 

with internal order handling and trading systems that would be 

reporting information to the central repository. Therefore, proposed 

Rule 613(d) would provide that the NMS plan filed with the Commission 

include a requirement that each national securities exchange and 

national securities association, and their members, synchronize their 

business clocks that are used for the purposes of recording the date 

and time of any event that must be reported under the proposed Rule. 

The proposed Rule would require each exchange, FINRA, and their members 

to synchronize their clocks to the time maintained by the National 

Institute of Standards and Technology (``NIST''), consistent with 

industry standards.\226\ Exchanges, associations, and the members would 

be required to synchronize their business clocks in accordance with 

these requirements within four months after effectiveness of the NMS 

plan.\227\

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    \226\ See proposed Rule 613(d)(1).

    \227\ See proposed Rule 613(a)(3)(ii).

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    The Commission is not proposing to set a standard within which the 

clocks must be synchronized to the NIST (e.g., to within one second of 

the NIST clock), in recognition of how quickly technology can improve 

and increase the speed at which orders are handled and executed. 

Rather, the Commission is proposing that the clocks be synchronized 

``consistent with industry standards.'' The exchanges and FINRA would 

be able, however, to set a limit in the NMS plan to be filed with the 

Commission. Also, in recognition of the pace at which technology 

improves, the proposed Rule provides that the NMS plan shall require 

each national securities exchange, national securities association, and 

its respective members to annually evaluate the actual synchronization 

standard adopted to consider whether it should be shortened, consistent 

with changes in industry standards.\228\ When engaging in this annual 

evaluation, exchanges, associations, and members could take into 

account the feasibility of shortening the time standard, and whether 

shortening the standard would allow for the conveyance of additional 

meaningful information to the consolidated audit trail.

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    \228\ See proposed Rule 613(d)(2).

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    The Commission requests comment on whether this approach is 

practical and would provide for sufficient flexibility in determining 

how closely to synchronize clocks. Is the proposed Rule's requirement 

that each exchange, association, and member synchronize its clocks in 

accordance with the time maintained by NIST reasonable? To what extent 

do SROs and their members currently synchronize clocks? Please answer 

with specificity. Would synchronization as proposed require significant 

systems modifications on behalf of national securities exchanges, 

national securities association, or their respective members? Is it 

reasonable to require clocks to be synchronized with the time 

maintained by NIST within a time frame that is ``consistent with 

industry standards''? Is there another standard that should be used by 

the Commission? The Commission also requests comment on the feasibility 

of requiring the exchanges, FINRA, and their members to comply with 

these requirements within four months of effectiveness of the NMS plan.



F. Central Repository



    The proposed Rule would require that the NMS plan provide for the 

creation and maintenance of a central repository, which would be a 

facility of each exchange and FINRA.\229\ The central repository would 

be jointly owned and operated by the exchanges and FINRA, and the NMS 

plan would be required to provide, without limitation, the Commission 

and SROs with access to, and use of, the data reported to and 

consolidated by the central repository for the purpose of performing 

their respective regulatory and oversight responsibilities pursuant to 

the federal securities laws, rules, and regulations. Each of the 

exchanges and FINRA would be a sponsor of the plan,\230\ and as such 

would be responsible for selecting a plan processor to operate the 

central repository.\231\

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    \229\ See proposed Rule 613(e)(1).

    \230\ See supra note 173 for a definition of a plan sponsor in 

Rule 600(a)(70) of Regulation NMS, 17 CFR 242.600(a)(70).

    \231\ See infra Section III.I. for a definition and discussion 

of the plan processor.

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    The Commission requests comment on the need for a central 

repository to receive and retain the consolidated audit trail 

information. Are there alternatives to creating a central repository 

for the receipt of order audit trail information? The Commission also 

requests comment on whether it is practical or appropriate to require 

the exchanges and FINRA to jointly own and operate the central 

repository.



[[Page 32580]]



1. Responsibilities of Central Repository To Collect, Consolidate, and 

Retain Information

    The central repository would be responsible for the receipt, 

consolidation, and retention of all data submitted by the national 

securities exchanges, national securities associations and their 

members pursuant to the proposed Rule and the NMS plan.\232\ Further, 

the central repository would be required to collect from the central 

processors and retain on a current and continuous basis the NBBO for 

each NMS security, transaction reports reported pursuant to an 

effective transaction reporting plan filed with the Commission pursuant 

to, and meeting the requirements of, Rule 601 of Regulation NMS, and 

last sale reports reported pursuant to the OPRA Plan filed with the 

Commission pursuant to, and meeting the requirements of, Rule 608 of 

Regulation NMS.\233\ The central repository would be required to 

maintain this NBBO and transaction data in a format compatible with the 

order and event information reported pursuant to the proposed Rule.

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    \232\ See proposed Rule 613(e)(1).

    \233\ See proposed Rule 613(e)(5). The central repository would 

be required to retain the information collected pursuant to 

subparagraph (c)(7) and (e)(5) of the proposed Rule in a convenient 

and usable standard electronic data format that is directly 

available and searchable electronically without any manual 

intervention for a period of not less than five years. The 

information would be required to be available immediately, or if 

immediate availability could not reasonably and practically be 

achieved, any search query would be required to begin operating on 

the data not later than one hour after the search query is made. See 

proposed Rule 613(e)(6).

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    This requirement is intended to allow SRO and Commission staff to 

easily search across order, NBBO, and transaction databases. The 

Commission preliminarily believes that having the NBBO information in a 

format compatible with the order audit trail information would be 

useful for enforcing compliance with federal securities laws, rules and 

regulations. The NBBO is used by regulators to evaluate members for 

compliance with numerous regulatory requirements, such as the duty of 

best execution or Rule 611 of Regulation NMS.\234\ Regulators would be 

able to compare order execution information to the NBBO information on 

a more timely basis because the order and execution information would 

be available on a real time basis and all of the information would be 

available in a compatible format in the same database. The SROs also 

may enjoy economies of scale by adopting standard cross-market 

surveillance parameters for these types of violations. This information 

also would be available to the Commission to assist in its oversight 

efforts.

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    \234\ See Rule 611 of Regulation NMS, 17 CFR 242.611. See also 

ISE Rule 1901, NYSE Arca 6.94, and Phlx Rule 1084.

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    The Commission also preliminarily believes that requiring the 

central repository to collect and retain in its database the 

transaction information in a format compatible with the order execution 

information would aid in monitoring for certain market manipulations. 

As discussed above, the proposed Rule would require that each report of 

the execution (in whole or in part) of an order sent to the central 

repository include a notation as to whether the execution was reported 

to the consolidated tape pursuant to an effective transaction reporting 

plan or the OPRA Plan.\235\ This requirement should allow regulators to 

more efficiently evaluate certain trading activity. For example, 

trading patterns of reported and unreported trades may cause the staff 

of an SRO to make further inquiry into the nature of the trading to 

determine whether the public was receiving accurate and timely 

information regarding executions and that market participants were 

continuing to comply with the trade reporting obligations under SRO 

rules. Similarly, patterns of reported and unreported transactions 

could be indicia of market abuse, including failure to obtain best 

execution for customer orders or possible market manipulation. Being 

able to more efficiently compare the consolidated order execution data 

with the trades reported to the consolidated tape could thus be an 

important component of overall surveillance activity.

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    \235\ See supra Section III.D.1.v.

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    The Commission requests comment on the usefulness or necessity of 

requiring the central repository to collect and retain in a format 

compatible with the order audit trail information the NBBO and 

transaction report information to help achieve the stated objectives of 

the consolidated audit trail. Do commenters believe that it is 

important for achieving the purposes of the consolidated audit trail? 

If so, why? If not, why not? What are the advantages and disadvantages 

of maintaining transaction information separately from order and 

execution data included in the consolidated audit trail? Should the 

transaction information be included in the consolidated audit trail 

report? The Commission requests comment on whether the requirement that 

the transaction and NBBO information be maintained in a format 

compatible with the order information is practical. Would this 

requirement achieve the goal of helping SRO and Commission staff 

conducts searches and run surveillances across databases?

    The Commission has recently required that issuers report certain 

data in interactive data format such as XBRL.\236\ This proposal does 

not specify any particular or required data format, but allows the SROs 

to select a data format. Should the Commission require that the data be 

transmitted or stored in any particular format? What are the relative 

merits of flat data files, relational data files, and interactive data 

files? What other formats should be considered? In what format can the 

SROs and their members efficiently transmit data? In what format would 

the data required in the proposal be most easily accessed?

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    \236\ See Securities Act Release No. 9002 (January 30, 2009), 74 

FR 6776 (February 10, 2009) (Interactive Data to Improve Financial 

Reporting adopting release) (File No. S7-11-08).

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    The proposed Rule would require the NMS plan to require the central 

repository to retain the information collected pursuant to subparagraph 

(c)(7) and (e)(5) of the proposed Rule in a convenient and usable 

standard electronic data format that is directly available and 

searchable electronically without any manual intervention for a period 

of not less than five years. The information would be required to be 

available immediately, or if immediate availability could not 

reasonably and practically be achieved, any search query would be 

required to begin operating on the data not later than one hour after 

the search query is made.\237\

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    \237\ See proposed Rule 613(e)(6).

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    The Commission preliminarily believes that the information (or the 

results of a query searching the information) should generally be 

available immediately. However, the Commission recognizes that the 

results of an electronic search query may not be immediately available 

because, for instance, the system must check an extremely large number 

of records to answer the query or the system may need to retrieve 

records from electronically archived data. In the case of archived 

data, the Commission preliminarily proposes requiring that the search 

query would need to begin operating on the data not later than one hour 

after the query is made. The Commission requests comment as to whether 

one hour would be reasonable amount of time to allow for accessing 

archived data. Under current technological limitations, how long should 

it take to access, in an electronic query with no manual intervention, 

archived data of the type to be held by



[[Page 32581]]



the central repository? The Commission also requests comment on whether 

it should mandate a time standard, such as one hour, in the proposed 

Rule. Further, the Commission requests comment on whether the central 

repository should be required to retain this information for longer or 

shorter than five years. The Commission also requests comment on the 

cost impact of these proposed record retention requirements. For 

example, could comparable functionality be obtained at lower cost with 

a different standard (for example, what would be the cost comparison 

for one hour versus two hours)?

2. Access to Central Repository and Consolidated Audit Trail 

Information and Confidentiality of Consolidated Audit Trail Information

    Each national securities exchange and national securities 

association, as well as the Commission, would have access to the 

central repository for purposes of performing its respective regulatory 

and oversight responsibilities pursuant to the federal securities laws, 

rules, and regulations. Such access would include access to all systems 

of the central repository, and access to and use of the data reported 

to and consolidated by the central repository.\238\ The proposed Rule 

also would require that the NMS plan provide that such access to and 

use of such data by each exchange, association, and the Commission for 

the purpose of performing its regulatory and oversight responsibilities 

pursuant to the federal securities laws, rules, and regulations shall 

not be limited.\239\ In addition, the proposed Rule would require that 

the NMS plan include a provision requiring the creation and maintenance 

by the central repository of a method of access to the consolidated 

data.\240\ This method of access would be required to be designed to 

include search and reporting functions to optimize the use of the 

consolidated data.

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    \238\ See proposed Rule 613(e)(2).

    \239\ Id.

    \240\ See proposed Rule 613(e)(3).

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    The Commission's access to the central repository, and access to 

and use of the data maintained by the central repository, for purposes 

of performing the Commission's responsibilities under the federal 

securities laws, rules, and regulations could not be limited in any 

way.\241\ The Commission requests comment as to whether the proposed 

Rule as proposed would accomplish this objective? If not, why not? If 

not, please provide comment as to an alternative or additional way to 

accomplish this objective. The Commission also requests comment on the 

advantages or disadvantages of Commission ownership or co-ownership of 

the data maintained by the central repository.

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    \241\ As noted above, the central repository would be a facility 

of each exchange and FINRA (see supra note 229 and accompanying 

text), and as such, subject to the Commission's recordkeeping and 

inspection authority. See, e.g., Section 17 of the Exchange Act, 17 

U.S.C. 78q. Further, any amendment to the NMS plan would be filed 

with the Commission pursuant to Rule 608 of Regulation NMS, and 

would not become effective unless approved by the Commission or 

otherwise as permitted in accordance with the requirements of Rule 

608. See proposed Rule 613(a)(5), and Rule 608(a) and (b) of 

Regulation NMS, 17 CFR 242.608(a) and (b).

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    As discussed above, the proposed Rule would require the reporting 

of customer information, as well as information about ``live'' orders, 

to the central repository on a real time basis. The Commission 

recognizes the sensitivity of this information, and believes that 

maintaining the confidentiality of, and limiting the use of, the data 

is essential. Without such protections, broker-dealers and the 

investing public could be at risk for security breaches that would 

potentially have a detrimental impact on their financial condition, as 

well as their trading activity and the markets. The consolidated data 

also would include information about members' trading activities on 

competitors' markets. The Commission therefore is proposing several 

requirements designed to limit access to, and help assure 

confidentiality and proper use of, the information.

    As noted above, the proposed Rule would limit the use of the 

consolidated data by the SROs for purposes of performing their 

respective regulatory and oversight responsibilities pursuant to the 

federal securities laws, rules, and regulations.\242\ This proposed 

restriction would not prevent any SRO from using the data that it 

individually collects and provides to the central repository pursuant 

to the proposed Rule for other purposes as permitted by applicable law, 

rule or regulation.

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    \242\ See proposed Rules 613(e)(2). See also proposed Rule 

613(e)(4)(i) (requiring in part that the NMS plan include a 

provision requiring all plan sponsors and their employees to agree 

not to use the consolidated data for any purpose other than 

surveillance and regulatory purposes).

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    The Commission requests comment as to whether access to the 

consolidated audit trail information should be limited to the SROs and 

the Commission, or whether there should be other access allowed. For 

example, should SROs or the central repository be allowed to make the 

data available to third parties, such as for academic research? If so, 

should the data be permitted to be sold to help offset costs? By SROs? 

By the central repository? If so, should there be set parameters? If 

the data were made available to third parties, what protections should 

be put in place to ensure the confidentiality of the data? Are there 

particular data elements that are more sensitive and should not be sold 

to help ensure the privacy of any individual and proprietary 

information? Are there particular data elements that would pose fewer 

concerns if released on a significant time lag? How long would such a 

time lag need to be? What other concerns might arise from the use of 

the data for non-regulatory purposes? Would use of the data provide 

certain market participants with undue information advantages over 

other market participants, increasing informational asymmetry in the 

markets? Would the provision of market data to third parties affect the 

willingness of market participants to trade in the U.S. markets? On the 

other hand, would enhanced surveillance of the markets as a result of 

the consolidated audit trail attract additional trading volume to the 

U.S. markets? What would be the implications, if any, under the 

financial privacy provisions of the Gramm-Leach-Bliley Act? \243\ The 

Commission also requests comment as to whether, and to what extent, 

other regulators, such as the Commodity Futures Trading Commission, 

should have access to the data? For instance, to what extent do 

commenters believe it would be beneficial for the Commission to work 

with other regulators to collectively share information each regulator 

has with respect to products and trading activity under its 

jurisdiction, to help the Commission and other regulators carry out 

their respective oversight of products and trading activity within 

their own jurisdiction? Would such sharing of information help the 

Commission better understand the impact of trading in other markets on 

trading activity and products within the Commission's jurisdiction?

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    \243\ 15 U.S.C. 6801-6809.

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    The Commission also requests comment on the feasibility of, and 

need for, a method of access to the consolidated data that includes 

search and reporting functions. In addition, the Commission requests 

comment as to whether, in addition to requiring the central repository 

to provide a method of access, the central repository should be 

required to bear the cost of making available the raw order data 

received by the central repository, for purposes of using that data to 

perform regulatory functions. Commenters are requested to



[[Page 32582]]



provide cost estimates for the provision of this data by the central 

repository to the SROs and the Commission.

    Proposed Rule 613(e)(4)(i) also would require that the NMS plan 

include policies and procedures, including standards, to be used by the 

plan processor to ensure the security and confidentiality of all 

information submitted to, and maintained by, the central repository. 

The plan sponsors, and employees of the plan sponsors and central 

repository, would be required to agree to use appropriate safeguards to 

ensure the confidentiality of such data, and not to use such data for 

other than for surveillance regulatory purposes.\244\ The Commission is 

not proposing to mandate the content or format of the policies and 

procedures and standards that would be required. Rather, the Commission 

believes that the SROs themselves are in the best position to determine 

how best to implement this requirement.

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    \244\ See proposed Rule 613(e)(4)(i). However, a plan sponsor 

would be permitted to use the data that it submits to the central 

repository for regulatory, surveillance, commercial, or other 

purposes as otherwise permitted by applicable law, rule or 

regulation. Id.

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    The Commission requests comment generally on the issue of 

appropriate safeguards to be put in place by the SROs and the central 

repository to help ensure confidentiality. Are there specific 

safeguards that the SROs and the central repository could use to ensure 

the confidentiality and appropriate usage of the data collected and 

submitted pursuant to the proposed Rule? For example, should the 

proposed Rule require that SROs put in place specific information 

barriers or other protections to help ensure that data is used only for 

regulatory purposes? Should there be an audit trail of the SROs' 

personnel access to, and use of, information in the central repository 

to help monitor for compliance with appropriate usage of the data? 

Should the requirement that the NMS plan include policies and 

procedures to be used by the plan processor to ensure the security and 

confidentiality of information submitted to, and maintained by, the 

central repository be expanded to include the content of any searches 

or queries performed by the SROs or the Commission on the data? What 

should be required? Please be specific in your answer.

    The Commission would establish appropriate protections within the 

agency to help ensure the confidentiality of the records.

3. Reliability of Data Collected and Consolidated

    An audit trail is only as reliable as the data used to create it. 

The Commission believes that it is critical to the integrity of the 

consolidated audit trail that the data submitted by the national 

securities exchanges, national securities associations and their 

members be submitted in a timely manner, and be accurate and complete. 

Proposed Rule 613(e)(4)(ii) therefore would require that the NMS plan 

include policies and procedures, including standards, for the plan 

processor to use to help ensure the integrity of the information 

submitted to the central repository. Specifically, the policies and 

procedures would be required to be designed to help ensure the 

timeliness, accuracy, and completeness of the data provided to the 

central repository by the SROs and their members. The Commission 

expects that these policies and procedures would include the creation 

of certain validation parameters that would need to be met before data 

would be accepted into the central repository.

    The proposed Rule also would require that the NMS plan include 

policies and procedures, including standards, governing how and when 

the plan processor should reject data provided to the central 

repository that does not meet these validation parameters. Further, the 

proposed Rule would require the NMS plan to include policies and 

procedures that would govern how to re-transmit data that was rejected 

once it has been corrected, and how to help ensure that information is 

being resubmitted.\245\ The Commission expects that re-transmitted data 

would also be subject to the validation parameters to assure that the 

initial problem(s) with the data has been corrected.

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    \245\ See proposed Rule 613(e)(4)(iii).

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    In addition, the proposed Rule would require that the NMS plan 

include policies and procedures to ensure the accuracy of the 

consolidation of the data by the plan processor provided to the central 

repository. Again, the Commission notes that it is not proposing to 

mandate the form and content of such policies and procedures. Rather, 

it believes the SROs would be in a better position to determine how 

best to implement this requirement. The Commission requests comment on 

these proposed requirements. Is this approach practical to ensure the 

integrity of the data? Are there any alternative methods that would 

achieve the same purpose that are preferable? How much latency would 

result from a validation procedure?

    As noted above, the Commission believes it is critical to the 

integrity of the consolidated audit trail that data submitted to the 

central repository be submitted in a timely manner and be accurate and 

complete. To support this objective, as discussed below in Sections 

III.H.1 and III.H.2, the proposed Rule also would require the NMS plan 

to include mechanisms to ensure compliance by the plan sponsors and 

their members with the requirements of the plan.\246\ The purpose of 

the provisions, with respect to SRO compliance, is to require the SROs 

themselves to implement a method to help ensure compliance with the NMS 

plan, as is required by Rule 608 of Regulation NMS. Although the 

Commission is not proposing to mandate the format of the mechanism, the 

Commission preliminarily believes that it could include the imposition 

of penalties on an SRO in the event an SRO failed to comply with any 

provision of the NMS plan. Further, the Commission preliminarily 

believes that the mechanism to help ensure compliance by members could 

include the imposition of fines on a member, subject to the rules of 

the SRO of which it is a member, in the event a member failed to comply 

with the requirements of the NMS plan or the SRO's rules.

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    \246\ See proposed Rule 613(h)(3) and Rule 613(g)(4).

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G. Surveillance



    Proposed Rule 613(f) would require each national securities 

exchange and national securities association subject to the proposed 

Rule to develop and implement a surveillance system, or enhance 

existing surveillance systems, reasonably designed to make use of the 

consolidated information contained in the consolidated audit trail. The 

proposed Rule would require each national securities exchange and 

national securities association to implement such new or enhanced 

surveillance system within fourteen months after effectiveness of the 

NMS plan.\247\ Currently, SROs are required to surveil members' trading 

activity for compliance with federal securities laws, rules, and 

regulations, such as rules relating to front running, trading ahead, 

market manipulation, and quote rule



[[Page 32583]]



violations, as well as other Commission and SRO rules. The Commission 

understands that although SROs carry out certain surveillances in real 

time, such as for looking for pricing anomalies or other indicators of 

erroneous transactions, most surveillance currently is not done on a 

real time basis. The Commission preliminarily believes the systems that 

carry out this surveillance should be updated, or new systems should be 

created, to make use of the consolidated audit trail information that 

would be generated and maintained by the central repository, otherwise 

the purpose of requiring a consolidated audit trail would not be 

achieved.

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    \247\ See proposed Rule 613(a)(3)(iv). The SROs would be 

required to begin reporting information to the central repository 

within twelve months after effectiveness of the NMS plan. The 

Commission is proposing to allow SROs two additional months (for a 

total of fourteen months) to update their surveillance systems to 

allow for testing of new surveillances for some period of time after 

the SROs begin providing information. The Commission requests 

comment on this time period. Should it be longer? Shorter? If so, 

why?

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    The Commission generally requests comment on this proposed 

requirement, as well as the proposed timing for compliance. To what 

extent do SROs currently conduct surveillance of trading on their 

markets on a real time basis? To what extent could SROs make effective 

use of the proposed consolidated information to enhance or update their 

existing surveillance and regulation? How would SROs be able to enhance 

or change their existing surveillance and regulation to make use of the 

proposed consolidated information? Would the benefits of surveillance 

that the SROs would be able to undertake be justified by the costs of 

providing information to the central repository on a real time basis? 

Under the proposed Rule, national securities exchanges and national 

securities associations would be required to implement or enhance their 

surveillance systems prior to their members being required to provide 

information pursuant to the proposed Rule. Do commenters believe that 

surveillance systems should be in place in advance of member compliance 

or should these requirements happen simultaneously, or otherwise?

    The Commission is not proposing at this time to require coordinated 

surveillance across exchanges and FINRA. Rather, the Commission intends 

that each SRO would be responsible for surveillance of its own market 

and its own members using the consolidated audit trail information. The 

Commission would, however, encourage any coordinated surveillance 

efforts by the SROs, such as through a plan approved pursuant to Rule 

17d-2 under the Exchange Act,\248\ or a regulatory services agreement 

among one or more SROs. The Commission requests comment on whether it 

should undertake to require coordinated surveillance.

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    \248\ 17 CFR 240.17d-2. For example, the exchanges have entered 

into an agreement for the allocation of regulatory responsibilities 

pursuant to Rule 17d-2 under the Exchange Act concerning the 

surveillance, investigation, and enforcement of insider trading 

rules pertaining to members of the NYSE and FINRA who are also 

members of at least one of the other participating SROs. See 

Securities Exchange Act Release No. 58806 (File No. 4-566) (October 

17, 2008), 73 FR 63216 (October 23, 2008).

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H. Compliance With the NMS Plan



1. Exchanges and Associations

    Any failure by a national securities exchange or national 

securities association that is a sponsor of the NMS plan to comply with 

the requirements of the NMS plan would undermine the effectiveness of 

the proposed Rule. Therefore, the Commission would consider full 

compliance by these entities with the NMS plan of the utmost 

importance. To this end, the proposed Rule would provide that each 

national securities exchange and national securities association shall 

comply with the provisions of the NMS plan of which it is a sponsor 

submitted pursuant to the proposed Rule and approved by the 

Commission.\249\ In addition, the proposed Rule would provide that any 

failure by a national securities exchange or national securities 

association to comply with the provisions of the NMS plan of which it 

is a sponsor could be considered a violation of the proposed Rule.\250\ 

For example, a failure to provide required information to the central 

repository, a failure to develop and implement a surveillance system or 

enhance existing surveillance systems reasonably designed to make use 

of the consolidated data in the central repository, or any limitation 

on the ability of an SRO or the Commission to access and use the data 

maintained by the central repository for regulatory purposes would 

violate the proposed Rule. The Commission recognizes that its staff, 

and the SRO staff, may have to undertake certain technical actions to 

access the data, such as arranging for a live feed, querying the 

system, or upgrading systems to be able to receive the data. The 

Commission preliminarily would not view having to take such technical 

actions, by themselves, as a limitation. The Commission notes that the 

proposed Rule would require the central repository to maintain the data 

in a convenient and usable standard electronic data format that is 

directly available and searchable electronically without any manual 

intervention for a period of not less than five years. The information 

would be required to be available immediately, or if immediate 

availability could not reasonably and practically be achieved, any 

search query would be required to begin operating on the data not later 

than one hour after the search query is made.\251\ The Commission 

requests comment on whether other types of technical actions should not 

be viewed as an impermissible limitation on access. The Commission 

further notes that Rule 608(c) under the Exchange Act provides that 

``[e]ach self-regulatory organization shall comply with the terms of 

any effective national market system plan of which it is a sponsor or a 

participant.'' \252\ Thus, under this proposed Rule, the Commission may 

take any action authorized under the Exchange Act to discipline 

national securities exchanges and national securities associations for 

failure to comply with a rule under the Exchange Act.

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    \249\ See proposed Rule 613(h)(1)

    \250\ See proposed Rule 613(h)(2).

    \251\ See proposed Rule 613(e)(6) and supra note 237 and 

accompanying text.

    \252\ 17 CFR 242.608(c).

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    The proposed Rule also would require that the NMS plan include a 

mechanism to ensure compliance by the sponsors with the requirements of 

the plan.\253\ The purpose of this provision is to require the SROs 

themselves to implement a method to help ensure compliance with the NMS 

plan, as is required by Rule 608 of Regulation NMS. Although the 

Commission is not proposing to mandate the format of the mechanism, the 

Commission preliminarily believes that it could include the imposition 

of penalties on an SRO in the event an SRO failed to comply with any 

provision of the NMS plan. The Commission request comments on the types 

of sanctions or penalties that would be appropriate for the plan 

sponsors to levy for failure of an SRO to comply with the terms of the 

NMS plan.

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    \253\ See proposed Rule 613(h)(3).

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2. Members

    Any failure by a member of a national securities exchange or 

national securities association that is a sponsor of the NMS plan to 

collect and provide to the central repository the required audit trail 

information also would undermine the effectiveness of the proposed 

Rule. Therefore, the Commission would consider full compliance by these 

entities with the NMS plan of the utmost importance.

    To implement the proposed requirement that the NMS plan require the 

submission of certain information to the central repository by the 

members of the exchange and association sponsors of the plan, each 

exchange and



[[Page 32584]]



association would be required to file with the Commission pursuant to 

Section 19(b)(2) of the Exchange Act \254\ and Rule 19b-4 

thereunder,\255\ a proposed rule change to require its members to 

comply with the requirements of the proposed Rule and the NMS 

plan.\256\ The SROs would be required to file these proposed rule 

changes by 120 days after approval of the proposed Rule. The Commission 

preliminarily believes that this proposed time frame would provide the 

SROs sufficient time to file their proposed rule changes after the NMS 

plan has been approved,\257\ as the SRO rule filings would be 

substantially based on the content of the NMS plan.

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    \254\ 15 U.S.C. 78s(b)(2).

    \255\ 17 CFR 240.19b-4.

    \256\ See proposed Rule 613(g)(1). This provision in the 

proposed Rule echoes the requirement contained in Rule 608 that 

provides ``each self-regulatory organization also shall, absent 

reasonable justification or excuse, enforce compliance with any such 

plan by its members and persons associated with its members,'' 17 

CFR 242.608(c).

    \257\ The proposed Rule would require that the NMS plan be filed 

within 90 days of approval of the proposed Rule. See proposed Rule 

613(a)(1).

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    Further, the proposed Rule would directly require each member to 

(1) collect and submit to the central repository the information 

required by the Rule, and (2) comply with the clock synchronization 

requirements of the proposed Rule.\258\ In addition, the proposed Rule 

would require that the NMS plan include a provision that by subscribing 

to and submitting the plan to the Commission, each exchange and 

association that is a sponsor to the plan agrees to enforce compliance 

by its members with the provisions of the plan.\259\

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    \258\ See proposed Rule 613(g)(2).

    \259\ See proposed Rule 613(g)(3).

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    Finally, the proposed Rule would require the NMS plan to include a 

mechanism to ensure compliance with the requirements of the plan by the 

members of a national securities exchange or national securities 

association that is a sponsor of the NMS plan submitted pursuant to 

this Rule and approved by the Commission.\260\ The purpose of this 

provision is to require the SROs to implement a method to help ensure 

compliance with the NMS plan and the corresponding SRO rules by their 

members. Although the Commission is not proposing to mandate the format 

of the mechanism, the Commission preliminarily believes that it could 

include the imposition of fines on a member by an SRO of which it is a 

member in the event the member failed to comply with any provision of 

the NMS plan or the SRO's rules implementing the NMS plan. Any action 

taken against the member, including the imposition of the fine by the 

SRO, would be subject to the requirements of the SRO's other 

rules.\261\

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    \260\ See proposed Rule 613(g)(4).

    \261\ See Sections 6(b)(6), 6(b)(7), and 6(d)(1) of the Exchange 

Act, 15 U.S.C. 78f(b)(6), 78f(b)(7), and 78f(d)(1). See also, e.g. 

FINRA Rule 9217, CHX Article 12, Nasdaq OMX BX Rule 9216 and IM-9216 

and NYSE Rule 476A.

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    The Commission requests comment on these provisions regarding 

members' compliance with the proposed Rule and the NMS plan. Do 

commenters believe that these provisions would encourage members' 

compliance with the proposed Rule and the NMS Plan? If so, why? If not, 

what other provisions would be necessary or appropriate to promote 

compliance? What mechanisms should be part of a plan to promote 

compliance by members? Would it be appropriate to include violations of 

the proposed Rule, the NMS plan, or the SRO's rules implementing the 

NMS plan within existing SRO rules that impose minimum fines for 

violations of certain SRO rules? \262\ Would the exchanges or 

associations have to amend their rules to implement such a requirement? 

If so, how would they have to amend their rules? Are there other 

alternatives that would more effectively help ensure the accuracy and 

reliability of the information reported to the central repository by 

members? Would requiring the SROs to file their proposed rule changes 

to implement the requirements of the NMS plan with respect to the 

members within 120 days after approval of the proposed Rule provide 

sufficient time for SROs to draft the proposed rule changes? If not, 

why not?

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    \262\ See, e.g., FINRA Rule 9217 (providing for the imposition 

of fines in lieu of commencing a formal disciplinary proceeding for 

violations of certain rules, including the recording and reporting 

requirements of the OATS rules) and NYSE Rule 476A (providing for 

the imposition of fines in lieu of commencing a formal disciplinary 

proceeding for violations of certain rules, including the OTS 

rules).

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I. Operation and Administration of the NMS Plan



    The proposed Rule would require that the NMS plan include a 

governance structure to ensure fair representation of the plan 

sponsors.\263\ The rule as proposed gives flexibility to the SROs to 

devise a governance structure as they see fit. The proposed rule would 

require the NMS plan to include a provision addressing the percentage 

of votes required by the plan sponsors to effectuate amendments to the 

plan.\264\ For example, the plan sponsors could determine to provide 

each plan sponsor one vote on matters subject to a vote.\265\ Or, if 

there was a concern that this method would result in ``blocs'' of plan 

sponsors under common control exerting control in a one-sponsor, one-

vote system, the SROs could choose another alternative to ensure fair 

representation.

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    \263\ See proposed Rule 613(b)(1).

    \264\ See proposed Rule 613(b)(3).

    \265\ For example, Section 4.3 of the OPRA Plan provides that, 

except as otherwise provided, each of the members of the Management 

Committee shall be authorized to cast one vote for each Member that 

he or she represents on all matters voted upon by the Management 

Committee, and action of the Management Committee shall be 

authorized by the affirmative vote of a majority of the total number 

of votes the members of the Management Committee are authorized to 

cast, subject to the approval of the Commission whenever such 

approval is required under applicable provisions of the Exchange 

Act, and the rules of the Commission adopted thereunder. Action of 

the Management Committee authorized in accordance with the OPRA Plan 

shall be without prejudice to the rights of any Member to present 

contrary views to any regulatory body or in any other appropriate 

forum.

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    Further, most existing NMS plans require unanimous consent from the 

plan sponsors to effect an amendment.\266\ The Commission recognizes 

the unanimous consent requirement could be desirable because it helps 

to ensure that no plan sponsor is forced to comply with requirements 

with which it is unable to comply, or forced by the other sponsors to 

pay fees. However, a unanimous consent requirement also could allow one 

plan sponsor to effectively ``veto'' a provision desired by all other 

plan sponsors for competitive reasons, or permit one sponsor to lag 

behind in making updates to its systems or rules that would benefit the 

industry as a whole. The Commission proposes to allow the plan sponsors 

to determine whether to include in the NMS plan to be filed with the 

Commission a unanimity requirement for effectuating amendments to the 

plan, or some other convention.

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    \266\ See, e.g., Securities Exchange Act Release Nos. 60405 

(July 30, 2009), 74 FR 39362 (August 6, 2009) (order approving the 

Options Order Protection and Locked/Crossed Market Plan) and 17638 

(March 18, 1981), 22 S.E.C. Docket 484 (March 31, 1981) (order 

approving the OPRA Plan).

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    The Commission also recognizes that the scope or purpose of the 

proposed NMS plan may differ from existing plans. The Commission 

requests comment on whether there are lessons from previous experience 

that suggest that the governance structure of the NMS plan to be filed 

with the Commission should differ from existing plans. The Commission 

requests comment on these provisions relating to the governance 

structure of the plan. Should the Commission require certain governance 

standards to ensure efficient



[[Page 32585]]



cooperation, or should the exchanges and association be allowed to 

create a governance structure of their own choosing? What are the 

relative merits of unanimity or super majority requirements? What are 

the relative merits of alternative voting mechanisms and other 

governance structures available to the plan sponsors? Should the voting 

mechanism vary by the type of decision or should different decision 

making bodies have authority over different types of decisions to avoid 

situations where no decision is made because the sponsors cannot agree? 

How should the governance and voting mechanisms be set up to avoid 

inefficient operations or paralysis? Should there be limits on the time 

frames given to make decisions? Should there be mechanisms to resolve 

impasses once a decision has taken a certain amount of time? The 

Commission also requests comment on whether the scope of the plan, 

including the requirements on broker-dealers members, and the 

expectation of improved surveillances for investor protection dictate 

that the governance structure should differ from existing plans. In 

particular, should the SRO sponsors be required to include in the 

governance structure and decision-making authority representatives of 

members to address member interests and independent representatives 

chosen specifically to address investor and other public interests?

    The proposed Rule also would require that the NMS plan include 

provisions to govern the administration of the central repository, 

including the selection of a plan processor. A ``plan processor'' is 

defined in Rule 600 of Regulation NMS to mean any SRO or securities 

information processor acting as an exclusive processor in connection 

with the development, implementation and/or operation of any facility 

contemplated by an effective national market system plan.\267\ The 

Commission expects that the plan sponsors would engage in a thorough 

analysis and formal competitive bidding process to choose the plan 

processor. As proposed, the plan sponsors would be required to select a 

person to act as the plan processor for the central repository no later 

than two months after the effectiveness of the national market system 

plan.\268\ The Commission preliminarily believes that this time frame 

would provide the plan sponsors with sufficient time to choose the plan 

processor, while providing that such entity would be in place with 

enough time to create and build the central repository to receive data 

from the SROs within one year after effectiveness of the NMS plan and 

from the members within two years after such effectiveness.

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    \267\ See 17 CFR 242.600(55).

    \268\ See proposed Rule 613(a)(3)(i).

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    The Commission requests comment as to whether the proposed Rule 

should include specific requirements detailing the process for 

selection of a plan processor. Should the Commission require specific 

minimum requirements or standards that a plan processor should meet? If 

so, what requirement or standards would be necessary or appropriate? 

Should the plan processor be a non-SRO? Would this promote impartiality 

on the part of the plan processor? The Commission also requests comment 

on the proposed time frame to choose the plan processor. Is it too 

short? Too long? If so, why? Please be specific in your response.

    The proposed Rule also would require that the NMS plan contain a 

requirement that a Chief Compliance Officer (``CCO'') be appointed to 

regularly review the operation of the central repository.\269\ The CCO 

would be expected to establish reasonable procedures designed to make 

sure the operations of the central repository keep pace with technical 

developments. To the extent upgrades or other changes are necessary to 

assure the central repository's effectiveness, the CCO would be 

responsible for making recommendations for enhancements to the nature 

of the information collected and the manner in which it is processed.

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    \269\ See proposed Rule 613(b)(5).

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    The Commission requests comment on the necessity for a CCO to 

oversee the operation of the central repository. If commenters support 

the proposal to require a CCO, should the proposed Rule include a 

requirement that the CCO be independent from the plan sponsors and 

their members? That is, should the CCO be required to not have any 

actual or potential conflicts of interest with respect to the plan 

sponsors and their members (e.g. such as prior or future employment 

with a plan sponsor or member, or a material business relationship with 

a plan sponsor or member)? What are the risks of allowing a CCO who is 

affiliated or associated with a plan sponsor or its members? What types 

of conflicts of interest should be avoided? Are there any specific 

qualifications that a CCO should possess? Should there be a specific 

process in place for appointing a CCO or for removing a CCO for failure 

to perform his or her assigned duties? Should there be a limit to the 

number of years a CCO may serve as such?

    The plan sponsors also would be required to include in the NMS plan 

a provision addressing the requirements for the admission of new 

sponsors to the plan and the withdrawal of sponsors from the plan.\270\ 

Proposed Rule 613(b)(4) also would require that the sponsors develop a 

process for allocating among the plan sponsors the costs associated 

with implementing and operating the central repository, including a 

provision addressing the manner in which such costs would be allocated 

to sponsors who join the plan after it was approved. Various NMS plans 

have developed different ways to ensure that a fair cost or ``new 

participant fee'' is assessed upon new plan sponsors.\271\ For example, 

when determining a new participation fee, the OPRA Plan requires that 

the following factors be considered: (1) The portion of costs 

previously paid by OPRA for the development, expansion and maintenance 

of OPRA's facilities which, under generally accepted accounting 

principles, would have been treated as capital expenditures and would 

have been amortized over the five years preceding the admission of the 

new member; (2) an assessment of costs incurred and to be incurred by 

OPRA for modifying the OPRA System or any part thereof to accommodate 

the new member, which are not otherwise required to be paid or 

reimbursed by the new Member; and (3) previous fees paid by other new 

members. The plan sponsors could choose to include in the NMS plan to 

be filed a similar provision or develop a new method for determining 

the cost to join the plan that would better suit the NMS plan proposed 

to be required by this Rule.

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    \270\ See proposed Rule 613(b)(2).

    \271\ See e.g. Section 7.1 of OPRA Plan.

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    The Commission requests comment on whether the rule or plan should 

specify a method for allocating costs among the plan sponsors. The 

Commission also requests comment as to what provisions the exchanges 

and FINRA should include in the NMS plan relating to the admission of 

new plan sponsors and the withdrawal of existing plan sponsors. Should 

the Commission specify the process for the admission of new plan 

sponsors? What are the concerns, if any, that should be taken into 

account when providing for the admission of new plan sponsors? The 

Commission requests comment on all aspects of the proposed Rule 

relating to governance and administration of the NMS plan.



[[Page 32586]]



J. Proposed Implementation Schedule



    While the Commission preliminarily believes a comprehensive 

consolidated audit trail would be useful as soon as possible, the 

Commission also believes that it would be prudent to implement the Rule 

at a measured pace to ensure that all market participants are fully 

able to meet the requirements of the proposed Rule. Therefore, the 

proposed Rule would provide that the proposed data collection and 

submission requirements would first apply to national securities 

exchanges and national securities associations, but not to their 

individual members. As part of operating their businesses, the national 

securities exchanges and national securities associations are 

accustomed to handling large volumes of data and many already have in 

place electronic trading, routing and reporting systems.\272\ Further, 

under the proposal the exchanges would not be responsible for providing 

to the central repository, for each order, information relating to the 

customer. The Commission therefore preliminarily believes these systems 

could more readily and quickly be modified than the members' systems to 

comply with the requirements of the proposed Rule.

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    \272\ For example, as part of COATS compliance, the options 

exchanges are required to have in place systems to electronically 

capture all order, transaction, and quotation information on the 

exchange.

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    Specifically, proposed Rule 613(a)(3)(iii) would require the 

exchanges and associations to provide to the central repository the 

data to be required by the Rule within one year after effectiveness of 

the NMS plan. Members of the exchanges and associations would be 

required to begin providing to the central repository the data required 

by the proposed Rule two years after effectiveness of the NMS plan, 

which would be one year following the implementation deadline for the 

national securities exchanges and national securities 

associations.\273\ This phased approach is designed to allow members 

additional time to implement systems changes necessary to begin 

providing the information to the central repository and to develop 

procedures designed to capture customer and order information that they 

may not have previously been required to collect to comply with other 

Commission and SRO rules.

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    \273\ See proposed Rule 613(a)(3)(v).

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    The Commission requests comment on the proposed implementation time 

periods. Are these time periods practical or feasible? Should they be 

shorter? Longer? Please provide detailed reasons in your response. As 

proposed, the national securities exchanges and national securities 

associations would be required to submit data to the central repository 

for one year before their members are required to submit data. Is 

requiring the exchanges and FINRA to provide data before requiring 

their members to do so a feasible way to phase in compliance with the 

proposed rule? How would this phased-in approach affect the quality of 

the data and the number of available data items in the audit trail? Are 

there alternative ways to phase in implementation that would be more 

practical? For instance, should the Commission consider requiring all 

exchanges and FINRA and their respective members to begin reporting a 

subset of the data initially, and phase in the collection of addition 

data over time? Should the Commission require all exchanges, FINRA, and 

their members to implement the proposed requirements first for NMS 

stocks, then for listed options? Or vice versa? How should the 

Commission take into consideration any concern commenters might have 

that market participants might shift manipulative or other illegal 

trading activity to products or markets not covered by the proposed 

Rule in its analysis of whether, or how, to phase in compliance with 

the proposed Rule across products classes (meaning, NMS stock and 

listed options)? If so, how?

    Should ATSs,\274\ including so-called dark pools,\275\ be required 

to implement the proposed requirements before broker-dealers that are 

not registered as ATSs? Would ATSs be able to more quickly comply with 

the proposed recording and reporting requirements, since they generally 

are highly automated and their business may be more narrowly focused 

than, for example, broker-dealers that engage in a customer, 

proprietary, and/or market making business? Are there any cost savings 

associated with a phased approach to implementation? Would additional 

unnecessary costs be incurred by implementing the plan in a phased-in 

approach? Please provide data to support your views.

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    \274\ See supra note 181.

    \275\ Dark pools are ATSs that do not provide their best-priced 

orders for inclusion in the consolidated quotation data. In general, 

dark pools offer trading services to institutional investors and 

others that seek to execute large trading interest in a manner that 

will minimize the movement of prices against the trading interest 

and thereby reduce trading costs. Dark pools fall within the 

statutory definition of an exchange, but are exempted if they comply 

with Regulation ATS. See Concept Release on Equity Market Structure, 

supra note 19, at 3599, and supra note 181.

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IV. Request for Comments



    We request and encourage any interested person to comment generally 

on the proposed Rule. In addition to the specific requests for comment 

throughout the release, the Commission requests general comment on all 

aspects of proposed Rule 613 of Regulation NMS. The Commission 

encourages commenters to provide information regarding the advantages 

and disadvantages of each aspect of the proposed Rule. The Commission 

invites commenters to provide views and data as to the costs and 

benefits associated with the proposed Rule. The Commission also seeks 

comment regarding other matters that may have an effect on the proposed 

Rule. We request comment from the point of view of national securities 

exchanges, national securities associations, members, investors, and 

other market participants. With regard to any comments, we note that 

such comments are of great assistance to our rulemaking initiative if 

accompanied by supporting data and analysis of the issues addressed in 

those comments.



V. Paperwork Reduction Act



    Certain provisions of the proposal contain ``collection of 

information requirements'' within the meaning of the Paperwork 

Reduction Act of 1995 (``PRA'') \276\ and the Commission has submitted 

them to the Office of Management and Budget (``OMB'') for review in 

accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. An agency may not 

conduct or sponsor, and a person is not required to respond to, a 

collection of information unless it displays a currently valid OMB 

control number. The title of the new collection of information is 

``Creation of a Consolidated Audit Trail Pursuant to Section 11A of the 

Securities Exchange Act of 1934 and Rules Thereunder.''

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    \276\ 44 U.S.C. 3501 et. seq.

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A. Summary of Collection of Information Under Proposed Rule 613



1. Creation and Filing of an NMS Plan

    As detailed above, the proposed Rule would require each national 

securities exchange and national securities association to jointly file 

with the Commission, on or before 90 days from approval of the proposed 

Rule, an NMS plan to govern the creation, implementation, and 

maintenance of a consolidated audit trail and central repository for 

the collection of information for NMS securities.\277\ The



[[Page 32587]]



NMS plan would be required to require each exchange or association and 

its respective members to provide certain data to the central 

repository in compliance with proposed Rule 613.\278\ The NMS plan also 

would need to include certain specified provisions related to 

administration and operation of the plan,\279\ and the operation of the 

central repository.\280\ Further, the NMS plan would be required to 

include certain provisions related to compliance by the exchanges and 

associations and their members with the requirement of the proposed 

Rule and the NMS plan.\281\

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    \277\ See proposed Rule 613(a)(1) and supra Section III.

    \278\ See proposed Rule 613(c) and supra Section III.D.

    \279\ For example, the NMS plan would be required to include 

provisions: (1) To ensure fair representation of the plan sponsors; 

(2) for administration of the central repository; (3) addressing the 

requirements for admission of new plan sponsors and withdrawal of 

existing plan sponsors; (4) addressing the percentage of votes 

required by the plan sponsors to effectuate amendments to the plan; 

(5) addressing the manner in which the costs of operating the 

central repository would be allocated among the national securities 

exchanges and national securities associations that are sponsors of 

the plan, including a provision addressing the manner in which costs 

would be allocated to new sponsors to the plan. See proposed Rule 

613(b).

    \280\ For example, the NMS plan would be required to include a 

provision requiring the creation and maintenance by the central 

repository of a method of access to the data, including search and 

reporting functions. See proposed Rule 613(e)(3). Additionally, the 

NMS plan would be required to include policies and procedures, 

including standards, to be used by the plan processor to: (1) Ensure 

the security and confidentiality of all information submitted to, 

and maintained by, the central repository; (2) ensure the 

timeliness, accuracy, and completeness of the data provided to the 

central repository; (3) require the rejection of data that does not 

meet validation parameters and the retransmission of corrected data; 

and (4) ensure the accuracy of the consolidation by the plan 

processor of the data provided to the central repository. See 

proposed Rule 613(e)(4).

    \281\ The NMS plan would be required to include: (1) A provision 

that by subscribing to and submitting the plan to the Commission, 

each national securities exchange and national securities 

association that is a sponsor to the plan agrees to enforce 

compliance by its members with the provisions of the plan; and (2) a 

mechanism to ensure compliance by the sponsors of the plan with the 

requirements of the plan. See proposed Rule 613(g)(3) and (h)(3).

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    Each national securities exchange and national securities 

association would be required to be a sponsor of the NMS plan.\282\ The 

Commission preliminarily believes that requiring the proposed NMS plan 

would impose a paperwork burden on national securities exchanges and 

national securities associations associated with preparing and filing 

the joint NMS plan.

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    \282\ See proposed Rule 613(a)(5).

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2. Report

    Rule 613(i) also would require the national securities exchanges 

and national securities associations to jointly provide to the 

Commission a document outlining how such national securities exchanges 

and national securities associations would propose to incorporate into 

the consolidated audit trail information for: (1) Equity securities 

that are not NMS securities; (2) debt securities; and (3) primary 

market transactions in NMS stocks, equity securities that are not NMS 

securities and debt securities.\283\ This report would be required to 

specify in detail the data that would be collected and reported by each 

market participant, an implementation timeline, and a cost estimate. 

The Commission preliminarily believes that requiring the proposed 

report would impose a paperwork burden on national securities exchanges 

and national securities associations associated with preparing and 

submitting the report to the Commission.

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    \283\ See proposed Rule 613(i).

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3. Rule Filings by National Securities Exchanges and National 

Securities Associations

    Each national securities exchange and national securities 

association would be required to file with the Commission, pursuant to 

Section 19(b)(2) of the Exchange Act and Rule 19b-4 thereunder,\284\ a 

proposed rule change to require its members to comply with the 

requirements of the proposed Rule and the NMS plan submitted pursuant 

to the proposed Rule and approved by the Commission of which the 

national securities exchange or national securities association is a 

sponsor.\285\ The burden of filing such proposed rule change would 

already be included under the collection of information requirements 

contained in Rule 19b-4 under the Exchange Act.\286\

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    \284\ 15 U.S.C. 78s(b)(2) and 17 CFR 240.19b-4.

    \285\ See proposed Rule 613(g)(1).

    \286\ See Securities Exchange Act Release No. 50486 (October 5, 

2004), 69 FR 60287, 60293 (October 8, 2004) (File No. S7-18-04) 

(describing the collection of information requirements contained in 

Rule 19b-4 under the Exchange Act). The Commission has submitted 

revisions to the current collection of information titled ``Rule 

19b-4 Filings with Respect to Proposed Rule Changes by Self-

Regulatory Organizations'' (OMB Control No. 3235-0045). According to 

the last submitted revision concluded as of August 5, 2008, the 

current collection of information estimates 1,279 total annual Rule 

19b-4 filings with respect to proposed rule changes by self-

regulatory organizations.

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4. Collection and Retention of NBBO and Last Sale Data

    The central repository would be required to collect and retain on a 

current and continuing basis the national best bid and national best 

offer for each NMS security, transaction reports reported pursuant to a 

transaction reporting plan filed with the Commission pursuant to, and 

meeting the requirements of, Rule 601 of Regulation NMS, and last sale 

reports reported pursuant to the OPRA Plan.\287\ The central repository 

would be required to retain this information for a period of not less 

than five years.\288\

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    \287\ See proposed Rule 613(e)(5); 17 CFR 242.601.

    \288\ See proposed Rule 613(e)(6).

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5. Data Collection and Reporting

    The proposed Rule would require each national securities exchange, 

national securities association, and any member of such national 

securities exchange or national securities association to collect and 

electronically provide to the central repository details for each order 

and reportable event documenting the life of an order through the 

process of routing, modification, cancellation, and execution (in whole 

or in part).\289\ The proposed Rule would require the collection and 

reporting to the central repository of some information that national 

securities exchanges, national securities associations, and their 

members already are required to collect, and under certain 

circumstances, report to a third party, in compliance with existing 

Commission \290\ and SRO requirements.\291\ The proposed Rule



[[Page 32588]]



would, however, require exchanges, associations, and their members to 

report to the central repository information not required to be 

currently collected and reported pursuant to existing SRO audit trail 

rules.

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    \289\ See proposed Rule 613(c)(1) and supra Section III.D.

    \290\ For example, Rule 17a-3 requires broker-dealers to 

maintain the following information that would be captured by the 

proposed Rule: Customer name and address; time an order was 

received; and price of execution. 17 CFR 240.17a-3. Also, Rule 17a-

25 requires brokers to maintain the following information with 

respect to customer orders: Date on which the transaction was 

executed; account number; identifying symbol assigned to the 

security; transaction price; the number of shares or option 

contracts traded and whether such transaction was a purchase, sale, 

or short sale, and if an option transaction, whether such was a call 

or put option; the clearing house number of such broker or dealer 

and the clearing house numbers of the brokers or dealers on the 

opposite side of the transaction; prime broker identifier; the 

customer's name and address; the customer's tax identification 

number; and other related account information. 17 CFR 240.17a-25. 

This information would be captured by the proposed Rule. See also 

Section 17(a) of the Exchange Act, 15 U.S.C. 78q(a), and Rules 17a-1 

and 17a-4 under the Exchange Act, 17 CFR 240.17a-1 and 17 CFR 

240.17a-4.

    \291\ The audit trail rules of several of the national 

securities exchanges and FINRA require the following information be 

recorded: Date order was originated or received by a member, 

security or option symbol, clearing member organization, order 

identifier, market participant symbol, number of shares executed, 

designation of order as short sale, limit order, market order, stop 

order or stop limit order, account type or number, date and time of 

execution, and execution price and size. See BOX Ch. V, Section 4; 

BX Rule 6955; FINRA Rule 7440; Nasdaq Options Market Chapter IX, 

Section 4; Nasdaq Rule 6955; NYSE Rule 132B; and NYSE Amex Equities 

Rule 132B. This information would be captured pursuant to the 

proposed Rule.

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    For example, although members of national securities exchanges and 

national securities associations already should know the identity of 

their customers, and in some instances may be required to provide that 

information to the Commission or SRO staff upon request,\292\ the 

requirement to electronically capture and report detailed information 

sufficient to identify the customer to the central repository, in real 

time, would be new. Further, although some existing audit trail 

requirements include a unique order identifier,\293\ the proposed 

Rule's requirement that the unique order identifier remain with the 

order throughout its entire life, across markets and market 

participants, would go beyond the current requirements. In addition, 

although such members currently have unique market participant 

identifiers (``MPIDs''), such MPIDs may differ across markets, whereas 

the proposed Rule would require that each member have a unique 

identifier that is the same across all markets. The proposed 

requirements to report whether an order opens or closes a position for 

NMS stocks, and to report borrow information, also are not required to 

be marked on orders by current SRO or Commission rules. Further, much 

of the information that would be required for the first time to be 

reported to the central repository would be reported in real time, as 

the event is occurring.

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    \292\ See supra Section I.A. (discussing Rule 17a-25 and the EBS 

system).

    \293\ See supra Section I.C. (discussing the requirements of 

FINRA's OATS).

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6. Central Repository

    The proposed Rule would require that the central repository be 

responsible for the receipt, consolidation, and retention of all data 

submitted to the central repository by the national securities 

exchanges, national securities associations, and their members.\294\ 

The proposed Rule also would require that (1) the central repository 

retain the information collected pursuant to subparagraph (c)(7) and 

(e)(5) of the proposed Rule in a convenient and usable standard 

electronic data format that is directly available and searchable 

electronically without any manual intervention for a period of not less 

than five years, and (2) the information be available immediately, or 

if immediate availability cannot reasonably and practically be 

achieved, that any search query begin operating on the data not later 

than one hour after the search query is made.\295\ The Commission notes 

that a plan processor would be responsible for operating the central 

repository in compliance with the proposed Rule and the NMS plan.

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    \294\ See proposed Rule 613(e)(1). The Commission notes that a 

plan processor would be responsible for operating the central 

repository in compliance with the proposed Rule and the NMS plan.

    \295\ See proposed Rule 613(e)(6).

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B. Proposed Use of Information



1. Creation and Filing of NMS Plan

    As discussed in detail above, the NMS plan would govern the 

creation, implementation, and maintenance of a consolidated audit trail 

for NMS securities, which would aid the Commission and national 

securities exchanges and national securities associations in 

effectively and efficiently carrying out their regulatory 

responsibilities. The information that would be collected pursuant to 

the NMS plan would allow the SROs to more efficiently monitor trading 

activity in the securities markets, and would facilitate the Commission 

and the national securities exchanges and national securities 

associations' trading reconstruction efforts as well as enhance their 

monitoring, enforcement, and regulatory activities.

2. Report

    As the Commission states above in Section III.A., it ultimately 

intends for the proposed consolidated audit trail, if adopted, to be 

expanded to cover other securities, including equity securities that 

are not NMS securities, corporate bonds and other debt instruments; 

credit default swaps and other security-based swaps; and any other 

products that may come under the Commission's jurisdiction in the 

future. Further, the Commission preliminarily believes that it would be 

beneficial to expand the consolidated audit trail to include 

information on primary market transactions in NMS stocks and other 

equity securities that are not NMS stocks, as well as primary market 

transactions in debt securities. The Commission preliminarily believes 

that a timely expansion of the scope of the consolidated audit trail 

beyond NMS securities would be beneficial as illegal trading strategies 

that the consolidated audit trail would be designed to help detect and 

deter, such as insider trading, may involve trading in multiple related 

products other than NMS securities across multiple markets.

    To help ensure that such an expansion would occur in a reasonable 

time and that the systems and technology that would be used to 

implement the Rule as proposed are designed to be easily scalable, 

proposed Rule 613(i) would require that the NMS plan contain a 

provision requiring each national securities exchange and national 

securities association that is a sponsor of the plan to jointly provide 

to the Commission within two months after effectiveness of the NMS plan 

a document outlining how the sponsors would incorporate into the 

consolidated audit trail information with respect to: (1) Equity 

securities that are not NMS securities; (2) debt securities; and (3) 

primary market transactions in NMS stocks, equity securities that are 

not NMS securities, and debt securities. The sponsors specifically 

would be required to address, among other things, details for each 

order and reportable event that they would recommend requiring to be 

provided; which market participants would be required to provide the 

data; an implementation timeline; and a cost estimate. The Commission 

would be able to use the information contained in the report in its 

consideration and analysis of whether to expand the consolidated audit 

trail.

3. Collection and Retention of NBBO and Last Sale Data

    As discussed above, the requirement that the central repository 

collect and retain the NBBO and transaction data in an electronic 

format compatible with the order and event information collected 

pursuant to the proposed Rule is intended to allow SRO and Commission 

staff to easily search across order, NBBO, and transaction data bases. 

The Commission preliminarily believes that having the NBBO information 

in an electronic format compatible with the order audit trail 

information would be useful for SROs to enforce compliance with federal 

securities laws, rules and regulations.\296\ The Commission also 

preliminarily believes that requiring the central repository to collect 

and retain in its



[[Page 32589]]



database the transaction information in a format compatible with the 

order execution information would aid the SROs in being able to monitor 

for certain market manipulations.\297\

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    \296\ The NBBO is used by SROs and the Commission to evaluate 

members for compliance with numerous regulatory requirements, such 

as the duty of best execution or Rule 611 of Regulation NMS. See 

Rule 611 of Regulation NMS, 17 CFR 242.611. See also ISE Rule 1901, 

NYSE Arca 6.94, and Phlx Rule 1084. An SRO would be able to compare 

order execution information to the NBBO information on a more timely 

basis because the order and execution information would be available 

on a real time basis and all of the information would be available 

in a compatible format in the same database. The SROs also may enjoy 

economies of scale by adopting standard cross-market surveillance 

parameters for certain types of violations.

    \297\ See supra Section III.D.1.v. As discussed above, the 

proposed Rule would require that each report of the execution (in 

whole or in part) of an order sent to the central repository include 

a notation as to whether the execution was reported to the 

consolidated tape pursuant to an effective transaction reporting 

plan or the OPRA Plan. This requirement should allow regulators to 

more efficiently evaluate certain trading activity. For example, 

trading patterns of reported and unreported trades may cause the 

staff of an SRO or the Commission to make further inquiry into the 

nature of the trading to ensure that the public was receiving 

accurate and timely information regarding executions and that market 

participants were continuing to comply with the trade reporting 

obligations under SRO rules. Similarly, patterns in the reported and 

unreported transactions could be indicia of market abuse, including 

failure to obtain best execution for customer orders or possible 

market manipulation. Being able to more efficiently compare the 

consolidated order execution data with the trades reported to the 

consolidated tape could thus be an important component of overall 

surveillance activity.

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4. Data Collection and Reporting

    As discussed above, the Commission preliminarily believes that the 

data collection and reporting requirements of the proposed Rule would 

enhance the ability of SRO staff to effectively monitor and surveil the 

securities markets and thus detect and investigate potentially illegal 

activity in a more timely fashion, whether on one market or across 

markets. Further, the Commission preliminarily believes that the 

ability to access such data would improve the ability of SRO staff to 

conduct timely and accurate trading analysis for market reconstructions 

and complex enforcement inquiries or investigations, as well as 

inspections and examinations. Further, the Commission preliminarily 

believes that the ability to access such data would aid the Commission 

staff in its regulatory and market analysis efforts.

5. Central Repository

    The central repository would be required to receive and retain the 

data required to be submitted by the national securities exchanges, 

national securities associations, and their members pursuant to the 

proposed Rule. SROs and Commission staff would then have access to the 

data for regulatory purposes, as discussed above.



C. Respondents



1. National Securities Exchanges and National Securities Associations

    Proposed Rule 613 would apply to all of the fourteen national 

securities exchanges and to one national securities association (FINRA) 

currently registered with the Commission.

2. Members of National Securities Exchanges and National Securities 

Associations

    Proposed Rule 613 would apply to the approximately 5,178 broker-

dealers that are currently registered with the Commission and are 

members of the national securities exchanges or FINRA.\298\

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    \298\ This is the number of broker-dealers filing FOCUS Reports 

at year-end 2008. FOCUS Reports are required to be filed by all 

registered broker-dealers, with a few exceptions. Excluded from this 

number were recently established broker-dealers that had yet to 

become active, or broker-dealers no longer doing business that had 

yet to deregister.

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D. Total Annual Reporting and Recordkeeping Burden



1. Burden on National Securities Exchanges and National Securities 

Associations

a. Creation and Filing of NMS Plan

    Proposed Rule 613 would require the national securities exchanges 

and FINRA to jointly file with the Commission a joint NMS plan to 

govern the creation, implementation, and maintenance of a consolidated 

audit trail and a central repository. The Commission estimates that it 

would take each national securities exchange and national securities 

association approximately 840 burden hours of internal legal, 

compliance, information technology, and business operations time to 

develop and file the NMS plan, including the required provisions 

regarding governance, administration, and operation of the plan.\299\

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    \299\ The Commission derived the total estimated burdens from 

the following estimates, which are based on the Commission's 

understanding of, and burden estimates for, existing NMS plans: 

(Attorney at 400 hours) + (Compliance Manager at 100 hours) + 

(Programmer Analyst at 220 hours) + (Business Analyst at 120 hours). 

The Commission preliminarily believes that the cost of developing 

and filing the NMS plan pursuant to the proposed Rule would be 

comparable to the cost to create other existing NMS plans, 

recognizing that the proposed Rule may include more detail as to 

what must be incorporated and addressed in the NMS plan implementing 

the proposed Rule.

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    The Commission preliminarily expects that national securities 

exchange and national securities association respondents may incur one-

time external costs for outsourced legal services to develop and draft 

the NMS plan. While the Commission recognizes that the amount of legal 

outsourcing used may vary from SRO to SRO, the staff estimates that on 

average, each national securities exchange and national securities 

association would outsource 50 hours of legal time to develop and draft 

the NMS plan, for a capital cost of approximately $20,000 for each 

national securities exchange and national securities association 

resulting from outsourced legal work.\300\ Therefore, the Commission 

preliminarily estimates that the average one-time initial burden of 

developing and filing the NMS plan would be 840 burden hours plus 

$20,000 external costs for outsourced legal counsel per SRO, for an 

aggregate estimated burden of 12,600 hours plus $300,000 external 

costs.

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    \300\ Based on industry sources, the Commission estimates that 

the hourly rate for outsourced legal services in the securities 

industry is $400 per hour.

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    Once the national securities exchanges and national securities 

associations have established the NMS plan, the Commission estimates 

that, on average, each national securities exchange and national 

securities association would incur 192 burden hours annually to ensure 

that the NMS plan is up to date and remains in compliance with the 

proposed Rule,\301\ for an aggregate estimated burden of 2,880 hours.

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    \301\ The Commission derived the total estimated burdens from 

the following estimates, which are based on prior Commission 

experience with burden estimates: (Attorney at 64 hours) + 

(Compliance Manager at 64 hours) + (Programmer Analyst at 64 hours) 

= 192 burden hours.

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b. Report

    The Commission estimates that it would take each national 

securities exchange or national securities association approximately 

420 burden hours of internal legal, compliance, business operations and 

information technology staff time to create the report required by the 

proposed Rule.\302\ The Commission also expects that each national 

securities exchange and national securities association respondent may 

incur one-time external costs for outsourced legal services helping to 

prepare the report. Commission estimates that on average, each national 

securities exchange and national securities association would outsource 

25 hours of legal time to create the report, for an aggregate one-time 

capital cost of approximately $10,000.\303\ Therefore, the Commission



[[Page 32590]]



preliminarily estimates that the one-time initial burden of drafting 

the report required by the proposed Rule would be 420 burden hours plus 

$10,000 external costs for outsourced legal counsel per SRO, for an 

aggregate estimated burden of 6,300 hours and $150,000 external costs.

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    \302\ The Commission derived the total estimated burden from the 

following estimates, which assumes preparation of the report would 

impose approximately half of the approximate burden of preparing the 

plan, reflects half of the approximate burden of drafting and filing 

the NMS plan, and the Commission's preliminary view that the cost of 

preparing the report would not be as extensive as the drafting and 

filing of the NMS plan: (Attorney at 200 hours) + (Compliance 

Manager at 50 hours) + (Programmer Analyst at 110 hours) + (Business 

Analyst at 60 hours) = 420 burden hours per SRO.

    \303\ The Commission derived the total estimated burden for 

outsourced legal counsel based on the assumption that the report 

required by the proposed Rule would require approximately half the 

effort of drafting and filing the proposed NMS plan.

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c. Data Collection and Reporting

    The proposed Rule would require the collection and reporting on a 

real time basis of some information that national securities exchanges 

and national securities associations already collect to operate their 

business, and are required to maintain in compliance with Section 17(a) 

of the Exchange Act and Rule 17a-1 thereunder.\304\ For instance, the 

Commission believes that exchanges keep records pursuant to Section 

17(a) of the Exchange Act and Rule 17a-1 thereunder in electronic form, 

of the receipt of all orders entered into their systems, as well as 

records of the routing, modification, cancellation, and execution of 

those orders. However, the proposed Rule would require each SRO to 

collect and report additional and more detailed information, and to 

report the information to the central repository in real time in a 

specified uniform format. The Commission anticipates that exchanges may 

need to enhance or replace their current systems to be able to comply 

with the proposed information collection and reporting requirements of 

the proposed Rule.

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    \304\ 15 U.S.C. 78q(a); 17 CFR 240.17a-1.

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    The Commission recognizes that the extent to which a particular SRO 

would need to make systems changes would differ depending upon the 

SRO's current market structure and existing systems. However, the 

Commission preliminarily estimates that, on average, the initial one-

time burden per national securities exchange and national securities 

association for development and implementation of the systems needed to 

capture the required information and transmit it to the central 

repository in a specified format in compliance with the proposed Rule 

to be 2,200 hours.\305\ Further, the Commission estimates that, on 

average, each exchange and association would incur approximately 40 

hours of outsourced legal counsel legal time for the development and 

implementation of systems needed to capture the required information 

and transmit it to the central repository, and a one-time software and 

hardware cost of $4,542,940 per SRO to develop and implement the 

necessary systems. Therefore, the Commission preliminarily estimates 

that the average one-time initial burden per national securities 

exchange and national securities association for development and 

implementation of the systems needed to capture the required 

information and transmit it to the central repository in a specified 

format in compliance with the proposed Rule would be 2,200 burden hours 

plus $16,000 costs for outsourced legal counsel and $4,542,940 for 

hardware and software costs,\306\ for an aggregate estimated burden of 

33,000 hours and $68,384,100 external and systems costs.

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    \305\ The Commission derived the total estimated burdens from 

the following estimates, which reflect the Commission's experience 

with, and burden estimates for, SRO systems changes, and discussions 

with market participants: (Attorney at 100 hours) + (Compliance 

Manager at 80 hours) + (Programmer Analyst at 1,960 hours) + 

(Business Analyst at 60 hours) = 2,200 burden hours per SRO.

    \306\ These estimates are based on the Commission's previous 

experience with, and cost estimates for, SRO systems changes, and 

discussions with market participants. See Securities Exchange Act 

Release No. 50870 (December 16, 2004), 69 FR 77424 (December 27, 

2004) (``Regulation NMS Reproposing Release'') at 77480 (discussing 

costs to implement Rule 611 of Regulation NMS). Although the 

Commission recognizes that the substance of Rule 611 of Regulation 

NMS is not the same as the proposed Rule, the Commission 

preliminarily believes that the scope of the systems changes would 

be comparable.

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    Once a national securities exchange or national securities 

association has established the appropriate systems required for 

collection and transmission of the required information to the central 

repository in a specified format, the Commission preliminarily believes 

that it would be necessary for each national securities exchange or 

national securities association to undertake efforts to ensure that 

their system technology is up to date and remains in compliance with 

the proposed Rule, which could include personnel time to monitor each 

SRO's reporting of the required data and the maintenance of the systems 

to report the required data; activity related to adding extra systems 

capacity to accommodate new order types that would need to be reported 

to the central repository; or implementing changes to trading systems 

which might result in additional reports to the central repository. The 

Commission preliminarily estimates that, on average, it would take a 

national securities exchange or national securities association 

approximately 4,975 hours per year to ensure that the system technology 

is up to date and remains in compliance with the proposed Rule.\307\ 

The Commission also estimates that it would cost, on average, 

approximately $1.25 million per year per SRO to continue to comply with 

the proposed requirements to provide information to the central 

repository, including costs to maintain the systems connectivity to the 

central repository and purchase any necessary hardware, software, and 

other materials.\308\ Therefore, the Commission preliminarily estimates 

that the average ongoing annual burden per SRO would be approximately 

4,975 hours plus $1.25 million external costs to maintain the systems 

necessary to collect and transmit information to the central 

repository, for an aggregate estimated annual burden of 74,625 hours 

and $18,750,000 external systems costs.

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    \307\ The Commission derived the total estimated burdens from 

the following estimates, which reflect the Commission's preliminary 

view that annual ongoing costs would be approximately half the costs 

of developing and implementing the systems to capture the required 

information and transmit it to the central repository, and 

discussions with market participants: (Attorney at 1,500 hours) + 

(Compliance Analyst at 1,600 hours) + (Programmer Analyst at 1,375 

hours) + (Business Analyst at 500 hours) = 4,975 burden hours per 

SRO.

    \308\ This estimate includes an estimated cost of approximately 

$10,000 per month to maintain systems connectivity to the central 

repository, including back-up connectivity. This estimate is based 

on discussions with a market participant.

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d. Central Repository

    The proposed Rule would require national securities exchanges and 

national securities associations to jointly establish a central 

repository tasked with the receipt, consolidation, and retention of the 

reported order and execution information. The central repository thus 

would need its own system(s) to receive, consolidate, and retain the 

electronic data received from the SROs and their members. The system 

would be required to be accessible by the sponsors and the Commission 

for regulatory purposes, with validation parameters allowing the 

central repository to automatically check the accuracy and completeness 

of the data submitted, and reject data not conforming to these 

parameters. It is anticipated that the burdens of development and 

operation of the central repository would be shared among the plan 

sponsors.

    The Commission staff preliminarily estimates that there would be an 

average initial one-time burden of 17,500 hours per plan sponsor for 

development and implementation of the systems needed to capture the 

required information in compliance with the proposed Rule.\309\



[[Page 32591]]



Further, the Commission estimates that each exchange and association 

would incur software and hardware costs of approximately $4 million per 

plan sponsor related to systems development. Therefore, the Commission 

preliminarily estimates a one-time initial burden of 17,500 hours per 

plan sponsor, plus software and hardware costs of approximately $4 

million related to systems development,\310\ for an aggregate estimated 

burden of 262,500 hours and $60 million in external systems costs.

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    \309\ The Commission derived the total estimated burdens based 

on the following estimates, which are based on information provided 

to the Commission regarding the development of reporting systems for 

the collection, consolidation, and dissemination of quotation and 

last sale data and discussions with market participants: (Attorney 

at 3,000 hours) + (Compliance Manager at 4,000 hours) + (Programmer 

Analyst at 7,500 hours) + (Business Analyst at 3,000 hours) = 17,500 

per SRO. This figure excludes the number of burden hours required to 

create and file the NMS plan.

    \310\ This cost estimate includes the estimated costs that each 

exchange and association would incur for software and hardware costs 

related to systems development. This cost estimate also would 

encompass (1) costs related to engaging in an analysis and formal 

bidding process to choose the plan processor, and (2) any search 

undertaken to hire a CCO. See proposed Rule 613(a)(3)(i) (the plan 

sponsors would be required to select a person to act as a plan 

processor for the central repository no later than two months after 

the effectiveness of the NMS plan) and 613(b)(5) (the plan sponsors 

would be required to appoint a CCO to regularly review the operation 

of the central repository to assure its continued effectiveness in 

light of market and technological developments, and make any 

appropriate recommendations for enhancements to the nature of the 

information collected and the manner in which the information is 

processed).

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    Once the plan sponsors have established the systems necessary for 

the central repository to receive, consolidate, and retain the required 

information, the Commission estimates that the burden per plan sponsor 

to ensure that the system technology and functionality is up to date 

and remains in compliance with the proposed Rule would be 192 hours per 

year, for an estimated aggregate burden per year of 2,880 hours.\311\ 

The estimated burden would include actions taken to regularly review 

the operation of the central repository to assure its continued 

effectiveness and to determine the need for enhancements to accommodate 

the information required to be collected, or new information collected, 

and the manner in which the data is processed, as well as periodic 

assessments of the adequacy of the system technology and functionality 

of the central repository.

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    \311\ The Commission derived the total estimated burdens from 

the following estimates, which are based on prior Commission 

experience with burden estimates: (Attorney at 16 hours) + 

(Compliance Manager at 16 hours) + (Programmer Analyst at 16 hours) 

= 48 burden hours per quarter, or 192 burden hours per year.

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    After the central repository systems have been developed and 

implemented, there would be ongoing costs for operating the central 

repository, including the cost of paying the CCO; the cost of systems 

and connectivity upgrades or changes necessary to receive, consolidate, 

and store the reported order and execution information from SROs and 

their members; the cost, including storage costs, of collecting and 

maintaining the NBBO and transaction data in a format compatible with 

the order and event information collected pursuant to the proposed 

Rule; the cost of monitoring the required validation parameters, which 

would allow the central repository to automatically check the accuracy 

and completeness of the data submitted and reject data not conforming 

to these parameters consistent with the requirements of the proposed 

Rule; and the cost of compensating the plan processor. The Commission 

preliminarily assumes that the plan processor would be responsible for 

the ongoing operations of the central repository. The Commission 

estimates that these costs would be approximately $100 million in 

external costs to the plan processor for operation of the central 

repository per year, or approximately $6,666,666 per plan sponsor per 

year.\312\

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    \312\ The Commission derived the total estimated burdens based 

on discussions with market participants. The estimated annual cost 

includes an annual salary for a CCO of $703,800. This figure is 

based on a $391 per-hour figure for a Chief Compliance Officer from 

SIFMA's Management & Professional Earnings in the Securities 

Industry 2008, modified by Commission staff to account for an 1,800-

hour work-year and multiplied by 5.35 to account for bonuses, firm 

size, employee benefits, and overhead.

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e. Collection and Retention of the NBBO and Transaction Reports

    The proposed Rule would require that the central repository collect 

and retain on a current and continuous basis the NBBO for each NMS 

security, transaction reports reported pursuant to an effective 

transaction reporting plan, and last sale reports reported pursuant to 

the OPRA Plan. The central repository would be required to maintain 

this NBBO and transaction data in a format compatible with the order 

and event information collected pursuant to the proposed Rule.\313\ 

Further, the central repository would be required to retain the 

information collected pursuant to paragraphs (c)(7) and (e)(5) of the 

proposed Rule in a convenient and usable standard electronic data 

format that is directly available and searchable electronically without 

any manual intervention for a period of not less than five years. The 

information would be required to be available immediately, or if 

immediate availability could not reasonably and practically be 

achieved, any search query would be required to begin operating on the 

data not later than one hour after the search query is made.\314\

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    \313\ See proposed Rule 613(e)(5).

    \314\ See proposed Rule 613(e)(6).

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    The Commission preliminarily has included in the burden estimates 

to the plan sponsors of developing and implementing the systems 

necessary to capture the order audit trail information (see supra 

Section V.D.1.d) the: (1) Initial one-time hour burden per plan sponsor 

for development and implementation of the systems at the central 

repository necessary to receive and retain this NBBO and last sale 

information; (2) associated software and hardware costs; and (3) 

ongoing costs of receiving and retaining the NBBO and last sale 

information.\315\

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    \315\ See supra Section V.D.1.d.

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    The Commission estimates that the ongoing external costs to receive 

the NBBO and last sale data from the SIPs would be approximately $1,370 

per year.\316\

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    \316\ The Commission derived this estimate based on the average 

current cost of obtaining consolidated quotation and transaction 

information from existing quotation and transaction reporting plans.

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2. Members

    The Commission preliminarily believes that the proposed Rule would 

require the collection and reporting in real time of much of the 

information that registered broker-dealers already maintain in 

compliance with existing regulations.\317\ For example, Section 17 of 

the Exchange Act and Rule 17a-3 thereunder mandate that broker-dealers 

keep certain records of orders handled during the course of 

business.\318\ Certain information also is required to be collected and 

reported by broker-dealers in compliance with a Commission request 

pursuant to Rule 17a-25 under



[[Page 32592]]



the Exchange Act.\319\ The proposed Rule would, however, require SRO 

members to collect and report additional information for each order in 

a specified uniform format. In addition to the new information, the 

members also would be required to report most of the information on a 

real time basis to the central repository, which is not currently 

required. The Commission anticipates that SRO members would need to 

either enhance or replace their current order handling, trading, and 

other systems to be able to collect and report the required order and 

reportable event information to the central repository as required by 

the proposed Rule.

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    \317\ See Section 17(a) of the Exchange Act, 14 U.S.C. 78q(a), 

and Rules 17a-3, 17a-4, and 17a-25 under the Exchange Act, 17 CFR 

240.17a-3, 17 CFR 240.17a-4, and 17 CFR 240.17a-25; see also, e.g., 

BATS Rule 20.7; BOX Chapter V, Section 4; CBOE Chapter VI, Rule 

6.24; CHX Article 11, Rule 3; FINRA Rule 7440; Nasdaq Options Market 

Chapter IX, Section 4; NYSE Rule 132B; and NYSE Amex Equities Rule 

132B.

    \318\ 15 U.S.C. 78q et seq.; 17 CFR 240.17a-3. Generally, 

broker-dealers must keep a memorandum of each brokerage order, 

including the following information: The terms and conditions of an 

order or instructions; the account for which an order was entered; 

time of order entry and receipt and, to the extent feasible, time of 

execution; any modifications or cancellations (and, to the extent 

feasible, time of cancellation); execution price; and the identity 

of each associated person, if any, responsible for the account. See 

Rule 17a-3(a)(6)(i) under the Exchange Act, 17 CFR 240.17a-

3(a)(6)(i). Broker-dealers also are required to keep a record for 

each cash and margin account they hold, and the name and address of 

the beneficial owner of each such account. See Rule 17a-3(a)(9) 

under the Exchange Act, 17 CFR 240.17a-3(a)(9).

    \319\ See supra Section I.A for a detailed discussion of what 

information is required to be submitted upon request to the 

Commission pursuant to Rule 17a-25 under the Exchange Act, 17 CFR 

240.17a-25.

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    The Commission recognizes that the extent to which a particular 

member would need to make systems changes or replace existing systems 

would differ depending upon the member's current business operations 

and systems. The Commission preliminarily believes that members that 

rely mostly on their own internal order routing and execution 

management systems would need to make changes to or replace such 

systems to collect and report the required order and reportable event 

information to the central repository as required by the proposed Rule. 

The Commission estimates that there are approximately 1,114 of these 

types of members.\320\ The Commission preliminarily estimates the 

average initial one-time burden to develop and implement the needed 

systems changes to capture the required information and transmit it to 

the central repository in compliance with the proposed Rule for these 

members would be approximately 6,530 burden hours.\321\ The Commission 

also preliminarily estimates that these members would, on average, 

incur approximately $1.5 million in one-time external costs for 

hardware and software to implement the systems changes needed to 

capture the required information and transmit it to the central 

repository.\322\ Therefore, the Commission preliminarily estimates that 

the average one-time initial burden per member would be 6,530 hours and 

$1.5 million, for an estimated aggregate burden of 7,274,420 hours and 

$1,671,000,000.

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    \320\ This number includes members that are clearing broker-

dealers that carry customer accounts; broker-dealers that accept 

customer monies but do no margin business; introducing brokers that 

clear proprietary securities transactions; ATSs registered with the 

Commission; other clearing firms; and registered market makers. This 

number was derived from annual FOCUS reports filed with the 

Commission for the year ending in 2008.

    \321\ The Commission derived the total estimated burdens on the 

following estimates, which reflect the Commission's previous 

experience with, and burden estimates for, broker-dealer systems 

changes, and discussions with market participants: (Attorney at 

1,240 hours) + (Compliance Manager at 1,540 hours) + (Programmer 

Analyst at 2,750 hours) + (Business Analyst at 1,000 hours) = 6,530 

hours.

    \322\ These estimates are based on the Commission's previous 

experience with, and cost estimates for, broker-dealer systems 

changes, and discussions with market participants. See Regulation 

NMS Reproposing Release, supra note 306, at 77480 (discussing costs 

to implement Rule 611 of Regulation NMS). Although the Commission 

recognizes that the substance of Rule 611 of Regulation NMS is not 

the same as the proposed Rule, the Commission preliminarily believes 

that the scope of the systems changes would be comparable.

    These estimated hour burdens and systems costs would include the 

burden and costs, if any, that would be incurred by members to 

obtain the required customer information, including beneficial 

ownership, store it electronically, and transmit it to the central 

repository.

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    This number would likely overestimate the costs for some of these 

members and underestimate it for others. For example, it may 

overestimate the cost for ATSs as opposed to members that engage in a 

customer and proprietary (or market marking) business, in part because 

of the narrower business focus of some ATSs.\323\ The Commission also 

recognizes that some or all of these members may contract with one or 

more outside vendors to provide certain front-end order management 

systems. The third-party vendor may make changes to its systems to 

permit the members that use the system to capture and provide the 

required information to the central repository. Likewise, some or all 

of these members may contract with outside vendors to provide back-

office functionality. These third-party vendors may make changes to 

their systems to permit the members that use the systems to capture and 

provide the required information to the central repository. The cost of 

these changes may be shared by the various members that use the 

systems, and thus may result in a reduced cost to an individual member 

to implement changes to its own systems to comply with the requirements 

of the proposed Rule.

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    \323\ See Regulation NMS Reproposing Release, supra note 306, at 

77480.

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    Once such a member has established the appropriate systems and 

processes required for collection and transmission of the required 

information to the central repository, the Commission estimates that 

the proposal would impose on each member ongoing annual burdens 

associated with, among other things, personnel time to monitor each 

member's reporting of the required data and the maintenance of the 

systems to report the required data; activity related to adding extra 

systems capacity to accommodate new order types that would need to be 

reported to the central repository; or implementing changes to trading 

systems which might result in additional reports to the central 

repository. The Commission preliminarily estimates that, on average, it 

would take a member of a national securities exchange or national 

securities association approximately 3,050 burden hours per year 

continued compliance with the proposed Rule.\324\ The Commission also 

estimates that it would cost, on average, approximately $756,000 per 

year per member to maintain the systems connectivity to the central 

repository and purchase any necessary hardware, software, and other 

materials.\325\ Therefore, the Commission preliminarily estimates that 

the average ongoing annual burden per member would be approximately 

3,050 hours, plus $756,000 external costs to maintain the systems 

necessary to collect and transmit information to the central 

repository, for an estimated aggregate annual burden of 3,397,700 hours 

and $842,184,000.

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    \324\ The Commission derived the total estimated burdens on the 

following estimates, which reflect the Commission's preliminary view 

that ongoing costs would be approximately half of the costs of 

developing and implementing the systems to comply with the proposed 

Rule: (Attorney at 800 hours) + (Compliance Manager at 1,000 hours) 

+ (Programmer Analyst at 500 hours) + (Business Analyst at 750 

hours) = 3,050 burden hours.

    \325\ This estimate includes an estimated cost of approximately 

$10,000 per month to maintain systems connectivity to the central 

repository, including back-up connectivity. This estimate is based 

on discussions with a market participant.

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    The Commission preliminarily believes that other members generally 

would rely on functionality provided by third parties to electronically 

capture the required information and transmit it to the central 

repository in real time. For purposes of the proposed Rule, the 

Commission assumes that these members, which could include broker-

dealers defined as ``small entities'' for purposes of the Regulatory 

Flexibility Act,\326\ generally do not clear transactions and may not 

possess their own internal order routing and execution management 

systems, but instead rely on third-party providers for such 

functionality. Further, the Commission assumes that many of these 

members currently do not themselves report order or trade information 

and instead rely on their clearing firms or other third parties to do 

it for them.



[[Page 32593]]



These smaller members may look for ``turn key'' systems that could 

provide the functionality required by the proposed Rule. As such, the 

Commission preliminarily believes that these members would not 

undertake a fundamental restructuring of their business to comply with 

the proposed Rule. Instead, they might continue to rely on their 

clearing broker-dealer, or they might purchase a standardized software 

product provided by a third party that would provide the functionality 

to electronically capture the required information and transmit it to 

the central repository in real time. The Commission estimates that 

there are approximately 3,006 of these types of members.\327\ For these 

members, Commission staff preliminarily estimates the average external 

cost to compensate a third party, whether the clearing broker-dealer or 

other third party, for software that would provide the necessary 

functionality to electronically capture the required information and 

transmit it to the central repository, would be approximately $50,000 

per member.\328\ In addition, the Commission preliminarily estimates 

that each of these members, on average, would incur a one-time burden 

of 140 hours to incorporate this functionality.\329\ Therefore, the 

Commission preliminarily estimates an initial aggregate burden of 

420,840 hours and $150,300,000.

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    \326\ See infra Section IX.

    \327\ This number includes introducing broker-dealers that do 

not clear transactions. This number excludes non-clearing firms that 

specialize in direct participation programs; non-clearing firms that 

sell insurance products; and non-clearing firms that are 

underwriters and retailers of mutual funds because these firms do 

not deal in NMS securities. This number was derived from annual 

FOCUS reports filed with the Commission for the year ending in 2008.

    \328\ This estimate is based on the Commission's previous 

experience with, and burden estimates for, broker-dealer systems 

changes. See Regulation NMS Reproposing Release, supra note 306, at 

77480 (discussing costs to implement Rule 611 of Regulation NMS). 

Although the Commission recognizes that the substance of Rule 611 of 

Regulation NMS is not the same as the proposed Rule, the Commission 

preliminarily believes that the scope of the systems changes would 

be comparable.

    \329\ The Commission derived the estimated burdens from the 

following estimates, which are based on prior Commission experience 

with burden estimates: (Attorney at 50 hours) + (Compliance Manager 

at 50 hours) + (Programmer Analyst at 40 hours) = 140 hours.

    These estimated hour burdens and systems costs would include the 

burden and costs, if any, that would be incurred by members to 

obtain the required customer information, including beneficial 

ownership, store it electronically, and transmit it to the central 

repository.

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    Once such a member has procured the appropriate third party 

system(s) for collection and transmission of the required information 

to the central repository, the Commission preliminarily estimates that 

such a member would continue to incur, on average, an external cost of 

$50,000 annually to compensate a third party, whether the clearing 

broker-dealer or for software that would provide the necessary 

functionality to capture the required information and transmit it to 

the central repository. The Commission also preliminarily estimates 

that each such member would incur a cost for compliance personnel 

necessary to oversee continued compliance with the proposed Rule, which 

would result in 64 burden hours annually for such member.\330\ 

Therefore, the Commission preliminarily estimates an aggregate ongoing 

burden of 192,384 hours and $150,300,000 to ensure compliance with the 

proposed Rule.

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    \330\ The Commission bases this estimate one a full-time 

Compliance Manager spending approximately 2 days per quarter of his 

time on overseeing ongoing compliance with the proposed Rule.

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    The Commission requests specific comments on each of its estimates 

with respect to the estimated burden and costs on members to comply 

with the proposed Rule. In particular, the Commission requests comment 

on the specific types and amount of costs, as well as internal staff 

burden, that would be incurred to modify members' order handling, 

trading, and other systems to comply with the proposed Rule. The 

Commission requests comment whether, and if so how, the estimated costs 

would be impacted if the members did not have to provide the 

information in proposed Rule 613(c)(7)(vi) and (vii) (the non-real time 

information).\331\ For instance, would requiring the reporting to the 

central repository of the account numbers for any subaccounts to which 

an execution is allocated, and the amount of a commission, if any, paid 

by the customer and the unique identifier of the broker-dealer(s) to 

whom the commission is paid, require changes to systems other than 

order handling and execution systems?

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    \331\ Proposed Rule 613(c)(7)(vi) would require the reporting to 

the central repository of the following information: (1) The account 

number for any subaccounts to which the execution is allocated (in 

whole or part); (2) the unique identifier of the clearing broker or 

prime broker, if applicable; (3) the unique order identifier of any 

contra-side order(s); (4) special settlement terms, if applicable; 

(5) short sale borrow information and identifier; and (6) the amount 

of a commission, if any, paid by the customer, and the unique 

identifier of the broker-dealer(s) to whom the commission is paid. 

Proposed Rule 613(c)(7)(vii) would require the reporting to the 

central repository of a cancelled trade indicator, if the trade is 

cancelled.

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E. Collection of Information Is Mandatory



    Each collection of information discussed above would be a mandatory 

collection of information.



F. Confidentiality



    The proposed Rule would require that the information to be 

collected and electronically provided to the central repository would 

only be available to the national securities exchanges, national 

securities association and the Commission for the purpose of performing 

their respective regulatory and oversight responsibilities pursuant to 

the federal securities laws, rules, and regulations.\332\ Further, the 

national market system plan submitted pursuant to the proposed Rule 

would be required to include policies and procedures to ensure the 

security and confidentiality of all information submitted to the 

central repository, and to ensure that all plan sponsors and their 

employees, as well as all employees of the central repository, shall 

use appropriate safeguards to ensure the confidentiality of such data 

and shall agree not to use such data for any purpose other than 

surveillance and regulatory purposes.\333\

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    \332\ See proposed Rule 613(e)(2).

    \333\ See proposed Rule 613(e)(4)(i).

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G. Retention Period of Recordkeeping Requirements



    National securities exchanges and national securities associations 

would be required to retain records and information pursuant to Rule 

17a-1 under the Exchange Act.\334\ Members would be required to retain 

records and information in accordance with Rule 17a-4 under the 

Exchange Act.\335\

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    \334\ 17 CFR 240.17a-1.

    \335\ 17 CFR 240.17a-4.

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H. Request for Comments



    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 

comment to: (1) Evaluate whether each proposed collection of 

information is necessary for the performance of the functions of the 

agency, including whether the information shall have practical utility; 

(2) evaluate the accuracy of the agency's estimate of the burden of 

each proposed collection of information; (3) enhance the quality, 

utility, and clarity of the information to be collected; and (4) 

minimize the burden of each collection of information on those who are 

to respond, including through the use of automated collection 

techniques or other forms of information technology.



[[Page 32594]]



VI. Consideration of Costs and Benefits



    The Commission is sensitive to the anticipated costs and benefits 

of the proposed Rule and requests comments on the costs and benefits of 

the proposed Rule. The Commission encourages commenters to identify, 

discuss, analyze, and supply relevant data regarding any such costs or 

benefits.



A. Benefits



    Proposed Rule 613 would require all national securities exchanges 

and national securities associations to jointly submit to the 

Commission an NMS plan to create, implement, and maintain a 

consolidated audit trail. The proposed consolidated audit trail would 

capture, in real time, certain information about each order (including 

quotations) for an NMS security, including the identity of the customer 

placing the order, and the details of routing, modification, 

cancellation, and execution (in whole or in part). In effect, an 

``electronic audit trail report'' would be created for every event in 

the life of the order. The consolidated audit trail would be maintained 

by a central repository, and all exchanges, FINRA and the Commission 

would have access to the consolidated audit trail data for regulatory 

purposes.

    The Commission preliminarily believes that proposed Rule 613 would 

significantly aid each of the exchanges and FINRA in carrying out its 

respective statutory obligations to be organized and have the capacity 

to comply, and enforce compliance by its members, with its rules, and 

with the federal securities laws, rules, and regulations. Likewise, the 

Commission believes that proposed Rule 613 would significantly aid the 

Commission in its ability to oversee the exchanges and associations, 

and to enforce compliance by the members of exchanges and associations 

with the respective exchange's or association's rules, and the federal 

securities laws and regulations. The proposed consolidated audit trail 

also would aid the Commission in its efforts to limit the manipulation 

of security prices, and to limit the use of manipulative or deceptive 

devices in the purchase or sale of a security. Further, the proposal 

would benefit exchanges, FINRA, and Commission staff by improving the 

ability of exchanges, FINRA and Commission staff to conduct more timely 

and accurate trading analysis for market reconstructions, complex 

enforcement inquiries or investigations, as well as inspections and 

examinations.

    Specifically, the Commission preliminarily believes that, as 

proposed, Rule 613 would enable exchanges and FINRA to more effectively 

and efficiently detect, investigate, and deter illegal trading 

activity, particularly cross-market illegal activity, in furtherance of 

their statutory obligations. In addition, the Commission preliminarily 

believes that proposed Rule 613 would enhance the ability of the 

Commission staff in its regulatory and market analysis efforts. The 

proposed rule would achieve these objectives in several ways. First, 

proposed Rule 613 would require the central repository to collect the 

same data on customer and order event information from each exchange, 

FINRA, and all members of the exchanges and FINRA, in a uniform format. 

Currently, the scope and format of audit trail information relating to 

orders and executions differs, sometimes significantly, among exchanges 

and FINRA. Thus, by requiring that all exchanges, FINRA and their 

members submit uniform customer and order event data to the central 

repository in a uniform format that would more readily allow for 

consolidation, the proposed Rule would allow regulators to more easily, 

and in a more timely manner, surveil potential manipulative activity 

across markets and market participants. The Commission preliminarily 

believes that this increased efficiency would enhance the ability of 

SRO and Commission staff to detect and investigate manipulative 

activity in a more timely manner, whether the activity is occurring on 

one market or across markets (or across different product classes). 

Timely pursuit of potential violations can be important in, among other 

things, seeking to freeze and recover any profits received from illegal 

activity.

    The Commission also preliminarily believes that the proposed 

consolidated audit trail would enhance the ability of SRO and 

Commission staff to regulate the trading of NMS securities by requiring 

that key pieces of information currently not captured in existing audit 

trails be reported to the proposed consolidated audit trail. For 

example, proposed Rule 613 would require that the customer that submits 

or originates an order be identified in the consolidated audit trail. 

In addition, the proposed Rule would require the assignment of unique 

identifiers for each order, each customer, and each broker-dealer and 

SRO that handles an order. Further, the proposed Rule would greatly 

enhance the ability to track an order from the time of order inception 

through routing, modification, cancellation, and execution. The 

Commission preliminarily believes that this information would allow 

regulators to more easily track potential manipulative activity across 

markets and market participants, and would place SRO and Commission 

staff in a better position to surveil whether exchange rules, as well 

as federal securities laws, rules and regulations, are complied with.

    The proposal also would require that most of the required audit 

trail information be submitted on a real time basis. Most existing 

audit trails currently collect information on orders at the end of the 

day, or upon request, rather than in real time.\336\ Other order and 

execution information, such as EBS data and Rule 17a-25 data, is 

provided to the Commission only upon request. The proposed consolidated 

audit trail would require that certain information about orders and 

executions be provided on a real time basis. The Commission 

preliminarily believes that this requirement could significantly 

increase the ability of SRO and Commission staff to identify and 

investigate manipulative activity in a more timely manner.\337\

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    \336\ See supra Sections I.C., I.D., II.A., and V.A.5.

    \337\ See supra Section III.D.1.

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    The Commission preliminarily believes that the proposal also would 

benefit exchanges, FINRA, and Commission staff by improving the ability 

of exchanges, FINRA and Commission staff to conduct timely and accurate 

trading analysis for market reconstructions, complex enforcement 

inquiries or investigations, as well as inspections and examinations. 

Today, trading activity is widely dispersed among various market 

centers, and one or more related orders for one or more securities or 

other related products may be routed to multiple broker-dealers and 

more than one exchange, or be executed in the OTC market. Thus, SRO and 

Commission regulatory staff investigating potentially illegal behavior 

may have to collect information from multiple broker-dealers and then 

examine, analyze and reconcile the disparate information provided in 

widely divergent formats to accurately reconstruct all trading activity 

during a particular time frame in the course of investigating 

potentially manipulative activity. Obtaining the necessary order and 

execution information and undergoing the necessary analysis to 

determine whether any wrongdoing exists based on the information 

available today requires substantial investment of time and effort on 

behalf



[[Page 32595]]



of regulatory authorities. Under proposed Rule 613, regulatory 

authorities would be able to access all information about events in the 

life of an order or related orders, and obtain critical information 

identifying the customer (or beneficial owner) behind the order(s) 

directly from the central repository in a uniform format. Thus, the 

Commission preliminarily believes that ability of SRO and Commission 

staff to conduct timely and accurate trading analysis for market 

reconstructions, complex enforcement inquiries and investigation, as 

well as inspections and examinations, would be significantly improved.

    The Commission also preliminarily believes that the proposal would 

benefit SROs, as well as the NMS for NMS securities, by ultimately 

reducing some regulatory costs, which may result in a more effective 

re-allocation of overall costs. For example, by providing a more 

comprehensive and searchable database, the Commission preliminarily 

believes that the consolidated audit trail would significantly decrease 

the amount of time invested by SRO staff to determine whether any 

illegal activity is occurring either on one market or across markets. 

Currently, SRO regulatory staff may need to submit multiple requests to 

its members during the course of an investigation into possible illegal 

activity, or submit multiple requests to ISG to obtain audit trail 

information from other SROs about trading in a particular security, and 

then commit significant staff time to collating and analyzing the data 

produced. The proposal would benefit the Commission in similar 

respects. For example, Commission staff often must submit numerous 

requests to members after the Commission receives information from 

equity cleared reports in an attempt to identify the ultimate customer 

(or beneficial account holder) that entered the order or orders in 

question. Substantial Commission staff resources currently are invested 

in analyzing the data that is received in response to these requests.

    Under proposed Rule 613, SRO regulatory staff would have immediate, 

easily searchable access to the consolidated audit trail data through 

the central repository for purposes of conducting surveillance, 

investigations, and enforcement activities. Commission staff likewise 

would have more efficient and timely access for purposes of conducting 

risk assessments of referrals received, investigations, and enforcement 

activities, and for purposes of conducting market reconstructions or 

other analysis. Thus, the Commission preliminarily believes that the 

proposal would benefit SRO and Commission staff, as well as the market 

for NMS securities as whole, by providing immediately accessible audit 

trail information to regulatory staff, which would in turn reduce staff 

time and effort that would otherwise be needed to collect and analyze 

audit trail information and allow such staff time and effort to be 

redirected to more effective uses, possibly even allowing the staff to 

engage in more investigations. In other words, if the costs per 

investigation decreased because of efficiencies in the proposed 

consolidated audit trail information, SRO or Commission staff may be 

able to review and investigate a greater amount of suspicious activity.

    Likewise, the Commission preliminarily believes that proposed Rule 

613 would benefit the exchanges, FINRA, the Commission, and the members 

of SROs, as well as investors and the public interest, by reallocating 

the overall cost of regulating the markets for NMS securities on an 

ongoing basis toward more efficient regulation. For instance, the 

Commission preliminarily believes that the proposed consolidated audit 

trail would eliminate the need for certain SRO and Commission rules 

that currently mandate the collection and provision of information, at 

least with respect to NMS securities. As noted above, many exchanges 

and FINRA each have their own disparate audit trail rules. Thus, a 

member of the various exchanges and FINRA could be subject to the audit 

trail rules of, and be required to submit different information to, 

more than one exchange and FINRA. The Commission intends that the 

proposed consolidated audit trail replace the need to have disparate 

SRO audit trail rules. If proposed Rule 613 were adopted, and the 

consolidated audit trail was implemented, the Commission preliminarily 

believes that the exchanges and FINRA would not need to have separate 

and disparate audit trail rules that apply to NMS securities applicable 

to their members. Thus, the Commission preliminarily believes that the 

proposed consolidated audit trail would ultimately result in the 

ability of SROs to repeal their existing audit trail rules because SRO 

audit trail requirements would be encompassed within proposed Rule 613. 

Similarly, the proposed consolidated audit trail also may render 

duplicative and thus unnecessary certain data obtained from the EBS 

system pursuant to Rule 17a-25 (and the SRO rules implementing the EBS 

system), and from the equity cleared data, at least as it relates to 

NMS securities. SRO and Commission staff instead would be able to 

access the audit trail information for every order directly from the 

central repository.\338\

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    \338\ The Commission notes that, if the proposed Rule were 

adopted, the SROs would need to consider the continued need for 

their existing audit trail rules until such time that their members 

begin complying with the requirements of the proposed Rule.

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    The Commission requests comment on any ongoing cost savings to SROs 

or their members that could be achieved by the proposal. Are there any 

other systems or technologies that could be replaced by the proposed 

audit trail? Would additional Commission action be required to achieve 

cost savings due to redundant rules or systems? Are there any new 

systems or technology requirements that could offset these potential 

cost savings? To what extent would any cost savings amount to a 

reallocation of resources towards more effective or efficient uses? 

Please provide specific examples. The Commission also requests comment 

as to whether the proposed Rule should require the NMS plan to include 

provisions relating to transition from the existing audit trails to the 

proposed consolidated audit trail.

    As discussed above, the Commission preliminarily believes that the 

proposal would significantly enhance the ability of SRO staff to 

efficiently and effectively regulate their market and their members, 

including detecting and investigating potential manipulative activity. 

The Commission also preliminarily believes that the proposed 

consolidated audit trail would benefit the Commission in its regulatory 

and market analysis efforts. More timely detection and investigation of 

potential manipulative activity may lead to greater deterrence of 

future illegal activity if potential wrongdoers perceive a greater 

chance of regulators identifying their activity in a more timely 

fashion. To the extent investors consider the improvement in 

regulators' ability to detect and investigate wrongdoing as significant 

to their investment decisions, investor trust, which is a component of 

investor confidence, is improved and investors may be more willing to 

invest in the securities markets.\339\ An increase in investor 

participation in the securities markets, at least to the extent that 

the increase is allocated efficiently, can potentially benefit the 

securities markets as a whole, through better capital formation. Thus, 

the Commission preliminarily believes that the proposed consolidated 

audit trail



[[Page 32596]]



would benefit the NMS for NMS securities by encouraging more efficient 

and potentially a higher level of capital investment.

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    \339\ See Guiso, Sapienza, and Zingales, ``Trusting the Stock 

Market,'' available at http://ssrn.acom/abstract=811545.

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    The Commission requests comment on how the proposal would impact 

investor protections and investor confidence. In particular, would the 

consolidated audit trail better align investor protections to the 

expectations that investors have about their protections? What would be 

the economic effect of the potential changes to investor protections or 

to better alignment of those protections with investor expectations? 

Would any of the anticipated benefits of the proposed Rule be mitigated 

if market participants alter their trading behavior, such as by 

shifting their trading activity to products or markets that do not 

require the capture of customer information to avoid compliance with 

the requirements of the proposed Rule? If so, please explain how so, 

and what, if any, steps the Commission should take in response.

    The Commission also preliminarily believes that proposed Rule 613 

would enhance the overall reliability of audit trail data that is 

available to the Commission and SRO regulatory staff. Because the 

proposed Rule would require that the NMS plan include policies and 

procedures, including standards, to be used by the plan processor to 

ensure the timeliness, accuracy, and completeness of the audit data 

submitted to the central repository, there would be an automatic check 

on the incoming audit trail data submitted by exchanges and FINRA, and 

their members, for reliability and accuracy. The Commission expects 

that these policies and procedures would include validation parameters 

that would need to be met before audit trail data would be accepted 

into the central repository, and that the central repository would 

reject data that did not meet certain validation parameters, and 

require resubmission of corrected data. Thus, the Commission 

preliminarily believes that the integrity of audit trail information 

available to the Commission and to the regulatory staff of the 

exchanges and FINRA would be enhanced and safeguarded by the provisions 

applicable to the central repository pursuant to proposed Rule 613.



B. Costs



    As discussed below, the Commission acknowledges that there likely 

would be significant up-front costs to implement the proposal. However, 

the Commission preliminarily believes that SRO and Commission staff, as 

well as SRO members, would realize other cost savings and benefits.

1. Creation and Filing of NMS Plan

    The proposed Rule would require the exchanges and FINRA to jointly 

develop and file an NMS plan to create, implement and maintain a 

consolidated audit trail that would capture customer and order event 

information in real time for all orders in NMS securities, across all 

markets, from the time of order inception through execution, 

cancellation or modification.\340\ Exchanges and FINRA would be 

expected to undertake any joint action necessary to develop and file 

the NMS plan, and there would be attendant costs in doing so. For 

example, the Commission anticipates that exchange and FINRA staff would 

need to meet and draft the required terms and provisions of the NMS 

plan.\341\ The Commission preliminarily believes that the existing 

exchanges and FINRA would incur an aggregate one-time cost of 

approximately $3,503,100 to prepare and file the NMS plan.\342\ Once 

exchanges and FINRA have established the NMS plan, the Commission 

estimates that, on average, each exchange and FINRA would incur a cost 

of $48,384 per year to ensure that the plan is up to date and remains 

in compliance with the proposed Rule,\343\ for an estimated aggregate 

annual cost of $725,760.

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    \340\ See proposed Rule 613(c)(1), (c)(3), (c)(7); see also 

supra Sections III.A., III.B., III.D., and V.A.5.

    \341\ As discussed above in Section III, these required 

provisions include provisions relating to: A governance structure to 

ensure the fair representation of the plan sponsors; administration 

of the plan, including the selection of the plan processor; the 

admission of new sponsors of the NMS plan and the withdrawal of 

existing sponsors from the plan; the percentage of votes required by 

the plan sponsors to effectuate amendments to the plan; the manner 

in which costs of operating the central repository would be 

allocated among the exchanges and FINRA, including a provision 

addressing the manner in which costs would be allocated to new 

sponsors of the plan; the appointment of a Chief Compliance Officer; 

the provision stating that by subscribing to and submitting the plan 

to the Commission each plan sponsor agrees to enforce compliance by 

its members with the provisions of the plan; and the provision 

requiring the creation and maintenance by the central repository of 

a method of access to the consolidated data that includes search and 

reporting functions. See proposed Rules 613(b), 613(e)(3), and 

613(g)(3). The NMS plan also would be required to include policies 

and procedures, including standards, to be used by the plan 

processor to ensure the security and confidentiality of all 

information submitted to the central repository; to ensure the 

timeliness, accuracy, and completeness of the data provided to the 

central repository; to require the rejection of data provided to the 

central repository that does not meet the validation parameters set 

out in the plan and the re-transmission of corrected data; and to 

ensure the accuracy of the processing of the data provided to the 

central repository. See proposed Rule 613(e)(4).

    \342\ This figure includes internal personnel time and external 

legal costs. Commission staff estimates that each exchange and 

association would expend (400 Attorney hours x $305 per hour) + (100 

Compliance Manager hours x $258 per hour) + (220 Programmer Analyst 

hours x $193 per hour) + (120 Business Analyst hours x $194 per 

hour) = $213,540. The $305 per-hour figure for an Attorney; the $258 

per hour figure for a Compliance Manager; the $193 per hour figure 

for a Programmer Analyst; and the $194 per hour figure for a 

Business Analysis (Intermediate) are from SIFMA's Management & 

Professional Earnings in the Securities Industry 2008, modified by 

Commission staff to account for an 1800-hour work-year and 

multiplied by 5.35 to account for bonuses, firm size, employee 

benefits, and overhead. Commission staff also estimates that each 

exchange and association would outsource, on average, 50 hours of 

legal time, at an average hourly rate of $400. Thus, the Commission 

preliminarily estimates, on average, a total cost of $233,540 per 

SRO. See supra Section V.D.1.a. (discussing PRA costs for developing 

and filing the NMS plan).

    \343\ Commission staff estimates that annually each exchange and 

association would expend (64 Attorney hours x $305 per hour) + (64 

Compliance Manager hours x $258 per hour) + (64 Programmer Analyst 

hours x $193 per hour) = $48,384, to ensure that the NMS plan is up 

to date and remains in compliance with the proposed Rule. See supra 

note 301.

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    In estimating the costs for creation of the NMS plan, the 

Commission considered exchange and FINRA staff time necessary for 

preparing and filing the plan with the Commission. The Commission also 

considered the cost of outsourced legal services. The Commission 

requests comment on whether there are additional costs that would 

contribute to the expense of creating and filing the NMS plan. Please 

describe any such cost in detail and provide an estimate of the costs. 

In estimating the ongoing costs of the NMS plan, the Commission 

considered exchange and FINRA staff time necessary for periodically 

reviewing the plan in light of current market trends and technology. 

The Commission requests comment on these estimates and what types of 

costs would be incurred to keep the plan up to date.

2. Synchronizing Clocks

    The proposed Rule would require each exchange and FINRA, and the 

members of each exchange and FINRA, to synchronize its business clocks 

that are used for the purpose of recording the date and time of any 

reportable event that must be reported pursuant to the proposed Rule to 

the time maintained by the National Institute of Standards and 

Technology, consistent with industry standards.\344\ As part of the 

initial implementation of the consolidated audit trail, the exchanges, 

FINRA and their members therefore would have to ensure that their 

business clocks are synchronized with the time maintained by the 

National Institute of



[[Page 32597]]



Standards and Technology. The proposed Rule also would require that the 

NMS plan provide for the annual evaluation of the synchronization time 

standard to determine whether it should be shortened, consistent with 

industry standards.\345\

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    \344\ See proposed Rule 613(d)(1).

    \345\ See proposed Rule 613(d)(2).

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    The Commission recognizes that the cost to each SRO and member to 

synchronize their clocks consistent with the proposed requirements 

would vary depending upon the SRO or member's existing systems. The 

Commission preliminarily believes, however, that most SROs and their 

members currently synchronize their clocks, and that therefore the SROs 

and their members would not incur significant costs to comply with this 

requirement.\346\ The Commission recognizes that each individual member 

or SRO's costs may vary depending upon their current synchronization 

practices, their business structure, their order management and trading 

systems, and their geographic diversity. The Commission preliminarily 

estimates that an SRO or member that would need to make system changes 

to comply with the requirement would incur an average one-time initial 

cost of approximately $9,650.\347\

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    \346\ See CHX Rule 4, Interpretations and Policies .02; FINRA 

Rule 7430; NYSE and NYSE Amex Equities Rule 123, Supplementary 

Material .23; NYSE and NYSE Amex Equities Rule 132A; and NYSE Arca 

Options Rule 6.20.

    \347\ Commission staff estimates that, on average, each 

exchange, association, and member would expend 50 hours of 

information technology time, at a cost of $193 per hour to make 

systems changes to comply with the requirement that clocks be 

synchronized. This estimate is based on discussions with market 

participants.

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    The Commission also preliminarily estimates that there would be an 

average ongoing annual cost of approximately $11,580 to each exchange, 

FINRA, and member to synchronize their business clocks to the time 

maintained by the National Institute of Standards and Technology, 

consistent with industry standards.\348\ Further, the Commission 

preliminarily estimates that there would be an average cost to 

exchanges, FINRA and their members of approximately $6,192 per SRO or 

member to annually evaluate the synchronization time standards to 

determine whether it should be shortened, consistent with industry 

standards.\349\

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    \348\ Commission staff estimates that each exchange, association 

and member would expend approximately five hours of information 

technology time, per month, at $193 per hour. This estimate is based 

on discussions with industry participants.

    \349\ This estimate assumes that each SRO or member would expend 

(16 Programmer Analyst hours x $193 per hour) + (16 Business Analyst 

hours x $194 per hour) = $6,192 to carry out this annual evaluation.

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    As stated above, the Commission preliminarily believes that the 

costs to the SROs and their members associated with synchronizing their 

clocks would not be significant because most SROs and their members 

currently synchronize their clocks. The Commission requests comments on 

whether commenters agree. If not, what costs would be incurred? Please 

be specific as to the type of changes necessary and the costs of making 

them. Further, the proposed Rule would require that all SROs and their 

members synchronize to same time standard and to the same level of 

accuracy. The Commission requests comment on its estimate of the cost 

to SROs and their members of initializing synchronizing business 

clocks, the ongoing costs for maintaining accurate synchronization, and 

the costs associated with annual evaluation of the synchronization time 

standard. Would SROs or their members incur costs, and if so, what 

types of costs?

3. Costs To Provide Information

    As discussed above in Section V.A.5, the Commission preliminarily 

believes that the proposed Rule would require the collection and 

reporting on a real time basis of some information that national 

securities exchanges and national securities associations already 

record to operate their business, and are required to maintain in 

compliance with Section 17(a) of the Exchange Act and Rule 17a-1 

thereunder.\350\ However, the proposed Rule would require each SRO to 

collect and report additional and more detailed information, and to 

report the information to the central repository in real time in a 

specified format. Based on discussions with SROs, the Commission 

anticipates that exchanges would need to enhance or replace their 

current systems to be able to comply with the proposed information 

collection and reporting requirements of the proposed Rule.

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    \350\ 15 U.S.C. 78q(a) et seq.; 17 CFR 240.17a-1. Rule 17a-1 

requires an exchange or association to keep and preserve at least 

one record of all documents or other records that shall be received 

by it in the course of its business as such and in the conduct of 

its self-regulatory activity. This would include records of the 

receipt of all orders entered into their systems, as well as records 

of the routing, modification, cancellation, and execution of those 

orders. The Commission understands that SROs have automated this 

process and thus keep these records in electronic format.

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    Likewise, the Commission preliminarily believes the proposed Rule 

would require the collection of much of the information that registered 

broker-dealers already maintain in compliance with existing 

regulations.\351\ The proposed Rule, however, would require members to 

collect additional information for each order and, in addition to the 

new information, the members also would be required to report most of 

the information on a real time basis to the central repository in a 

specified uniform format. Based on discussions with members, the 

Commission anticipates that the SRO members would need to enhance or 

replace their current order handling, trading and other systems to be 

able to collect and report the required order and reportable event 

information to the central repository as required by the proposed Rule.

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    \351\ See supra notes 317 to 319 and accompanying text.

---------------------------------------------------------------------------



    The Commission recognizes that the extent to which a particular SRO 

or member would need to make systems changes would differ depending 

upon the SRO's market structure (e.g., floor vs. electronic) and 

systems, or the member's current business operations and systems. The 

Commission preliminarily estimates that the average one-time, initial 

cost to exchanges and FINRA to put in place the systems necessary to 

identify, collect and transmit the consolidated audit trail information 

to the central repository would total approximately $5 million per 

SRO,\352\ for an aggregate estimated cost of $75 million for all SROs. 

In estimating this cost, the Commission has considered SRO staff time 

necessary to build new systems or enhance existing systems to comply 

with the proposed Rule.\353\ In addition, the Commission estimated 

costs for system hardware, software, and other materials.\354\ What 

other types of costs



[[Page 32598]]



might SROs incur? Please be specific in your response.

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    \352\ The Commission based this estimated cost on the 

Commission's previous experience with, and burden estimates for, SRO 

systems changes and discussions with market participants. See 

Regulation NMS Reproposing Release, supra note 306, at 77480 

(discussing costs of implementing Rule 611 of Regulation NMS). 

Although the Commission recognizes that the substance of Rule 611 is 

not the same as the proposed Rule, the Commission preliminarily 

believes that the scope of systems changes would be comparable.

    \353\ Commission staff estimates that each exchange and 

association would expend (100 Attorney hours x $305 per hour) + (80 

Compliance Manager hours x $258 per hour) + 1,960 Programmer Analyst 

hours x $193 per hour) + 60 Business Analyst hours x $194) = 

$441,060 to develop and implement the systems needed to capture the 

required information and transmit it. In addition, the Commission 

estimates that each exchange and association would expend 40 hours 

of outsourced legal time at an average rate of $400 per hour. See 

supra note 305.

    \354\ Commission staff estimates that the cost for system 

hardware, software, and other materials would be $4,542,940. See 

supra note 306 and accompanying text.

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    Once an SRO has implemented the changes necessary to collect and 

transmit the required information to the central repository as required 

by the proposed Rule, the Commission estimates that each SRO would 

incur, on average, an annual ongoing cost of $2.5 million to ensure 

compliance with the proposed Rule,\355\ for an estimated ongoing annual 

aggregate cost of $37.5 million for all SROs.

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    \355\ Commission staff estimates that each exchange and 

association would expend (1,500 Attorney hours x $305 per hour) + 

(1,600 Compliance Manager hours x $258 per hour) + (1,375 Programmer 

Analyst hours x $193 per hour) + (500 Business Analyst hours x $194 

per hour) to ensure that the systems technology is up to date and 

remains in compliance with the proposed Rule, for a total of 

$1,250,675. In addition, Commission staff estimates that each 

exchange and association would expend approximately $1.25 million on 

system hardware, software, connectivity and other materials. These 

estimates reflect the preliminary view that ongoing costs to 

maintain compliance with the proposed Rule would be half of the 

initial costs. See supra notes 307 and 308.

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    The Commission understands that many members, particularly smaller 

members, currently rely on third parties to report information required 

to be reported pursuant to SRO audit trail or other rules. For example, 

a member that is an introducing broker who sends all of its customer 

order flow to a clearing broker currently may rely on that clearing 

broker for reporting purposes. The Commission preliminarily believes 

that these members would not undertake a fundamental restructuring of 

their business to comply with the proposed Rule. Instead, they might 

continue to rely on their clearing broker-dealer, or they might look 

for the ability to purchase a standardized software product provided by 

a third party that would provide the functionality to electronically 

capture the required information and transmit it to the central 

repository in real time. The costs of this approach are likely to be 

significantly lower than the costs to a member that enhances its own 

systems, or creates new systems, to comply with the proposed 

requirements to report information to the central repository. The 

Commission estimates that there are approximately 3,006 of these types 

of members, and that the average cost to such members to compensate a 

third party, whether a clearing broker-dealer or other third party, for 

software that would provide the necessary functionality to 

electronically capture the required information and transmit it to the 

central repository would be approximately $50,000 per member.\356\ In 

addition, the Commission estimates that, on average, each member would 

incur a one-time cost of $35,870 to incorporate the new functionality 

into its existing systems to ensure compliance with the proposed 

Rule.\357\ Thus, the Commission preliminarily estimates that each of 

these members would incur, on average, a one-time cost of $85,870, for 

an estimated aggregate cost of $258,125,220.

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    \356\ See supra note 328. The Commission based this estimated 

cost on the Commission's previous experience with, and burden 

estimates for, broker-dealer systems changes. See Regulation NMS 

Reproposing Release, supra note 306, at 77480 (discussing costs of 

implementing Rule 611 of Regulation NMS). Although the Commission 

recognizes that the substance of Rule 611 is not the same as the 

proposed Rule, the Commission preliminarily believes that the scope 

of systems changes would be comparable.

    \357\ Commission staff estimates that annually each of these 

types of members would expend (50 Attorney hours x $305 per hour) + 

(50 Compliance Manager hours x $258 per hour) + (40 Information 

Analyst hours x $193 per hour) = $35,870 to incorporate the new 

functionality into its existing systems.

    These costs would include any systems or other changes necessary 

to obtain the required customer information, including the identity 

of the beneficial owner, and electronically storing it for 

transmittal to the central repository with the order information.

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    The Commission also preliminarily estimates that each of these 

members would continue to incur, on average, annual costs of $66,512 to 

ensure continued compliance with the proposed Rule.\358\

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    \358\ This estimate is based on a cost of $50,000 per year to 

compensate a third party for the functionality to capture the 

required information and transmit it to the central repository, and 

a cost of $16,512 for personnel time to oversee compliance with the 

proposed Rule (64 hours Compliance Manager x $258 per hour). See 

supra note 330.

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    Do commenters believe that smaller members would likely rely on 

third parties to provide a functionality that would provide required 

data to the central repository? Why or why not? Would it be more cost 

effective for a small member to enhance existing systems or create new 

systems to comply with the proposed Rule? Why or why not? What would be 

the costs associated with each approach? Should members that currently 

rely on another party to report, such as their clearing broker, be able 

to have their clearing firms report on their behalf? Why or why not? 

How would allowing third-party reporting impact the ability to report 

data in real time? Would the manner in which these members currently 

maintain customer information create practical difficulties for 

providing the beneficial ownership information, or additional burdens 

that have not been taken into account in estimating costs? For example, 

is customer information stored electronically? What is the impact of 

the manner in which this information is currently stored on the 

Commission's cost estimates?

    The Commission preliminarily estimates that there are 1,114 members 

that would undertake their own development changes to implement the 

proposed Rule.\359\ The Commission preliminarily estimates that the 

average one-time, initial cost to these members for development, 

including programming and testing of the systems necessary to identify, 

collect and transmit the consolidated audit trail information to the 

central repository, would be approximately $3 million per member,\360\ 

for an estimated aggregate cost of $3,342,000,000. This number would 

likely overestimate the costs for some of these members and 

underestimate it for others. For example, it likely overestimates the 

cost for ATSs as opposed to broker-dealers that have a customer and 

proprietary, or market-making, business, in part because of the 

narrower business focus of some ATSs. The Commission recognizes that 

some of these members may contract with one or more outside vendors to 

provide certain front-end order management systems. The third-party 

vendor may make changes to its systems to permit the members that use 

the system to capture and provide the required information to the 

central repository. Likewise, some of these members may contract with 

outside vendors to provide back-office functionality. These third-party 

vendors may make changes to their systems to permit the members that 

use the systems to capture and provide the required information to the 

central repository. The cost of these changes may be shared by the 

various members that use the systems, and thus may result in a reduced 

cost to an individual



[[Page 32599]]



member to implement changes to its own systems to comply with the 

requirements of the proposed consolidated audit trail.

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    \359\ See supra Section V.D.2 and note 320.

    \360\ Commission staff estimates that each member would expend 

(1,240 Attorney hours x $305 per hour) + (1,540 Compliance Manager 

hours x $258 per hour) + (2,750 Programmer Analyst hours x $193 per 

hour) + (1,000 Business Analyst hours x $194 per hour) = $1,500,270 

to develop and implement the systems needed to capture the required 

information and transmit it. In addition, the Commission estimates 

that the cost for system hardware, software, and other materials 

would be approximately $1.5 million. This estimate is based on the 

Commission's previous experience with, and burden estimates for, 

broker-dealer systems changes. See Regulation NMS Reproposing 

Release, supra note 306, at 77480 (discussing cost estimates for 

implementing Rule 611 of Regulation NMS). Although the Commission 

recognizes that the substance of Rule 611 is not the same as the 

proposed Rule, the Commission preliminarily believes that the scope 

of systems changes would be comparable. These costs would include 

any systems or other changes necessary to obtain the required 

customer information, including the identity of the beneficial 

owner, and electronically storing it for transmittal to the central 

repository with the order information.

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    The Commission requests comment on this estimate. Specifically, 

what types of costs would members incur building new systems, or 

enhancing existing systems, to comply with the proposed Rule? Would 

members need to expand their capacity as part of any systems upgrades? 

What would be the costs associated with this? Would the manner in which 

these members currently maintain customer information create practical 

difficulties for providing the beneficial ownership information, or 

additional burdens that have not been taken into account in estimating 

costs? For example, is customer information stored electronically? What 

is the impact of the manner in which this information is currently 

stored on the Commission's cost estimates?

    Once these members have largely implemented the changes necessary 

to collect and report the required order and reportable event 

information to the central repository as required by the proposed Rule, 

the Commission estimates that each such member would incur, on average, 

an annual ongoing cost of approximately $1.5 million,\361\ for an 

estimated aggregate ongoing cost of $1,671,000,000. These estimates 

would cover the costs associated with continued compliance with the 

proposed Rule.\362\

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    \361\ Commission staff estimates that each member would expend 

(800 Attorney hours x $305 per hour) + (1,000 Compliance Manager 

hours x $258 per hour) + (500 Programmer Analyst hours x $193 per 

hour) + (750 Business Analyst hours x $194 per hour) = $744,000 to 

ensure that the systems technology is up to date and remains in 

compliance with the proposed Rule. In addition, Commission staff 

estimates that each member would expend approximately $756,000 on 

system hardware, software, connectivity and other materials. These 

estimates reflect the preliminary view that ongoing costs to 

maintain compliance with the proposed Rule would be half of the 

initial estimated costs.

    \362\ See supra Section V.D.2.

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    The Commission requests comment on what ongoing costs SROs and 

their members would incur to continue to collect and report the 

required information in compliance with the proposed Rule. What types 

of costs would be included? Are there differences in the costs that 

SROs and their members would incur? Why or why not?

    The proposal would require the transmission of information in real 

time to the central repository. The Commission preliminarily believes 

that this approach would have greater benefits and would be lower cost 

than an alternative of transmitting all reports in batch mode. Real 

time submission could simply require a ``drop copy'' of a reportable 

event be sent to the central repository at the same time that the 

reportable event is otherwise occurring. Batching, however, would 

require the build up of reports to be sent periodically, and the amount 

of data sent in a batch could be significantly larger than the data 

sent in real time. The Commission requests comment on the technology 

requirements and other costs of real time transmission of information 

versus periodically batching the reports. Would real time reporting be 

more or less costly than batch reporting? Please explain with 

specificity why or why not and provide cost estimates. If real time 

reporting would be more expensive, are the greater costs justified by 

the benefits of real time reporting described above? If batch reporting 

is the better alternative, what should be the frequency of the batch 

reporting and why? Does the answer depend on the type of security? The 

Commission also requests comment on what types of systems changes SROs 

and members would need to make to implement the proposed Rule and NMS 

plan requirements, and the attendant costs. What specific types or 

items of information, if any, would be required to be reported to the 

central repository by a member that would not already be collected and 

maintained in an automated format?

4. Cost of Enhanced Surveillance Systems

    Pursuant to the proposed Rule, exchanges and FINRA also would be 

required to develop and implement a surveillance system, or enhance 

existing surveillance systems, reasonably designed to make use of the 

consolidated information collected through the proposed consolidated 

audit trail.\363\ The Commission preliminarily estimates that the 

average one-time cost to implement this requirement would be 

approximately $10 million for each exchange and FINRA, for an estimated 

aggregate cost of $150 million.\364\ The Commission also estimates, on 

average, ongoing annual costs associated with the enhanced surveillance 

would be approximately $2,610,600,\365\ for an estimated aggregate, 

ongoing cost of $39,159,000. Based on discussions with market 

participants, the Commission recognizes that these estimated costs may 

vary, perhaps significantly, based on the market model utilized by a 

particular SRO. For certain SROs, these figures may overestimate the 

costs associated with developing or enhancing surveillance systems, 

while for others, it may underestimate the costs. The Commission 

requests comment on whether these figures accurately estimate the costs 

for developing or enhancing surveillance systems to comply with the 

proposed Rule for the SROs. Would these figures be lower or higher for 

SROs whose trading systems are fully electronic? Would the cost 

estimates be higher or lower for those SROs that have a trading floor? 

What other considerations would impact individual SRO costs? Please be 

specific in your response.

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    \363\ See proposed Rule 613(f).

    \364\ This estimate is based on discussions with market 

participants. This estimate does not separately break out personnel 

time versus system costs.

    \365\ Commission staff estimates that each member would expend 

(3,600 Senior Compliance Examiner hours x $212 per hour) and (1,800 

Information Analyst hours x $193 per hour) to operate and monitor 

the enhanced surveillance systems and carry out surveillance 

functions. In addition, Commission staff estimates that each member 

would expend approximately $1.5 million on system hardware, 

software, connectivity and other technology per year on an on-going 

basis for this purpose. These estimates are based on discussions 

with a market participant.

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    The Commission also requests comment on whether SROs would be able 

to enhance their existing surveillance and regulation to make use of 

the proposed consolidated information or would they need to develop new 

surveillance systems to comply with the proposed Rule? How would SROs 

enhance their current surveillance systems? What would be the costs 

associated with updating current systems as opposed to developing new 

surveillance systems? Would it be more cost efficient to establish 

coordinated surveillance across exchanges and FINRA, rather than having 

each SRO be responsible for surveillance on its own market using the 

consolidated data? What would be the costs associated with developing 

consolidated cross-market surveillance?

5. Central Repository System

    The central repository would be responsible for the receipt, 

consolidation, and retention of all the data required to be submitted 

by the exchanges and FINRA, and their members. The proposed Rule also 

would require that the central repository collect and retain on a 

current and continuous basis the NBBO for each NMS security, 

transaction reports reported pursuant to an effective transaction 

reporting plan, and last sale reports reported pursuant to the OPRA 

Plan. The central repository would be



[[Page 32600]]



required to maintain the NBBO and transaction data in a format 

compatible with the order and event information collected pursuant to 

the proposed Rule. Further, the central repository would be required to 

retain the information collected pursuant to paragraphs (c)(7) and 

(e)(5) of the proposed Rule in a convenient and usable standard 

electronic data format that is directly available and searchable 

electronically without any manual intervention for a period of not less 

than five years. The information shall be available immediately, or if 

immediate availability cannot reasonably and practically be achieved, 

any search query must begin operating on the data not later than one 

hour after the search query is made.\366\

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    \366\ See proposed Rule 613(e)(6).

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    The central repository thus would need its own system(s) to 

receive, consolidate, and retain the electronic data received from the 

plan sponsors and their members, as well as to collect and retain the 

NBBO and last sale data. The system would be required to be accessible 

and searchable by the sponsors and the Commission for regulatory 

purposes,\367\ with validation parameters allowing the central 

repository to automatically check the accuracy and the completeness of 

the data submitted, and reject data not conforming to these parameters. 

It is anticipated that the costs of development and operation of the 

central repository would be shared among the plan sponsors. The 

Commission preliminarily estimates a one-time initial cost to create 

the central repository, its systems and structure, of approximately 

$120 million for an average cost of approximately $8 million per plan 

sponsor.\368\

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    \367\ The proposed Rule would require that the central processor 

create and maintain a method of access to the consolidated data. See 

proposed Rule 613(e)(3). The Rule requires that this method of 

access would be designed to include search and reporting functions 

to optimize the use of the consolidated data. The cost of creating a 

method of access to the consolidated audit trail data is included 

within the overall systems cost estimate.

    \368\ Commission staff estimates that each exchange and 

association would expend (3,000 Attorney hours x $305 per hour) + 

(4,000 Compliance Manager hours x $258 per hour) + (7,500 Programmer 

Analyst hours x $193 per hour) + (3,000 Business Analyst hours x 

$194 per hour) = $3,976,500 to create the central repository. In 

addition, the Commission estimates that the cost per exchange or 

association for system hardware, software, and other materials would 

be approximately $4 million. See supra Section V.D.1.d. and note 

309.

    This estimate includes the estimated costs that each exchange 

and association would incur for software and hardware costs related 

to systems development. This cost estimate also would encompass (1) 

costs related to engaging in an analysis and formal bidding process 

to choose the plan processor, and (2) any search undertaken to hire 

a CCO. See proposed Rule 613(a)(3)(i) (the plan sponsors would be 

required to select a person to act as a plan processor for the 

central repository no later than two months after the effectiveness 

of the NMS plan) and 613(b)(5) (the plan sponsors would be required 

to appoint a CCO to regularly review the operation of the central 

repository to assure its continued effectiveness in light of market 

and technological developments, and make any appropriate 

recommendations for enhancements to the nature of the information 

collected and the manner in which the information is processed).

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    Does this estimate accurately reflect SRO staff time needed to 

create the central repository as well as the costs for any hardware, 

software and other materials required? Are there other cost components 

to creating the central repository the Commission should consider? Is 

the creation of a central repository as described in the proposed Rule 

for collection and consolidation of data the most cost effective way to 

achieve the objective of creation of a consolidated audit trail? Are 

there other alternatives the Commission should consider? Please 

describe the costs associated with any alternatives described.

    Once the plan sponsors have established the systems necessary for 

the central repository to receive, consolidate, and retain the required 

information, the Commission estimates that ongoing annual costs to 

operate the central repository would be approximately $100 

million,\369\ which would be approximately $6.6 million per year per 

plan sponsor. The Commission also estimates that each plan sponsor 

would incur, on average, ongoing costs of $48,384 per year for actions 

taken to review the operation and administration of the central 

repository.\370\ In addition, the Commission estimates that the central 

repository would incur an ongoing cost of $1,370 per year to purchase 

the NBBO and last sale data feeds from the SIPs.\371\

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    \369\ See supra Section V.D.1.d. This cost estimate includes 

ongoing costs for operating the central repository, including the 

cost of systems and connectivity upgrades or changes necessary to 

receive, consolidate, and retain and store the reported order 

information from SROs and their members; the cost, including storage 

costs, of collecting and maintaining the NBBO and transaction data 

in a format compatible with the order and event information 

collected pursuant to the proposed Rule; the cost of monitoring the 

required validation parameters; the cost of compensating the plan 

processor; and an ongoing annual cost of $703,800 to compensate the 

CCO. See supra note 312.

    \370\ Commission staff estimates that annually each exchange and 

association would expend (64 Attorney hours x $305 per hour) + (64 

Compliance Manager hours x $258 per hour) + (64 Programmer Analyst 

hours x $193 per hour) = $48,384 to ensure and review the operation 

and administration of the central repository. See supra note 343 and 

accompanying text.

    \371\ See supra Section V.D.1.e.

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    The Commission request comment on these estimated costs. Does this 

estimate accurately reflect the cost of storing data in a convenient 

and usable standard electronic data format that is directly available 

and searchable, without any manual intervention, for a period of not 

less than 5 years? Would these costs estimates change if the scope of 

the consolidated audit trail were expanded to include equity securities 

that are not NMS securities; corporate bonds, municipal bonds, and 

asset-backed securities and other debt instruments; credit default 

swaps, equity swaps, and other security-based swaps? What systems or 

other changes would be necessary to accommodate these other products? 

How would those changes impact costs?

6. SRO Rule Filings

    The exchanges and FINRA also would be required to file proposed 

rule changes to implement the provisions of the NMS plan with respect 

to their members.\372\ The Commission notes that the exchanges and 

FINRA would be able to use the NMS plan as a roadmap to draft the 

content of their required proposed rule changes. The Commission also 

notes that the rule filing format and process is not new to the 

exchanges or to FINRA.\373\ The Commission estimates that the aggregate 

cost of each SRO filing a proposed rule change to implement the NMS 

plan to be approximately $590,175.\374\

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    \372\ See proposed Rule 613(g)(1).

    \373\ The Commission notes that, for its 2009 fiscal year 

(October 1, 2008 to September 30, 2009), the then existing twelve 

exchanges and FINRA filed approximately 1,308 proposed rule changes 

in the aggregate pursuant to Section 19(b) and Rule 19b-4 

thereunder.

    \374\ This figure was calculated as follows: (129 Attorney hours 

x $305) = $39,345 x 15 SROs = $590,175. Commission staff estimates 

that each exchange and association would expend approximately 129 

hours of legal time x $305 to prepare and file a complex rule 

change. See Securities Exchange Act Release No. 50486 (October 4, 

2004), 69 FR 60287 (October 8, 2004) (File No. S7-18-04). The $305 

per-hour figure for an attorney is from SIFMA's Management & 

Professional Earnings in the Securities Industry 2008, modified by 

Commission staff to account for an 1800-hour work-year and 

multiplied by 5.35 to account for bonuses, firm size, employee 

benefits, and overhead. See Securities Exchange Act Release No. 

59748 (April 10, 2009), 74 FR 18042, 18093 (April 20, 2009) (S7-08-

09) (noting the Commission's modification to the $305 per hour 

figure for an attorney).

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7. Expansion of the Proposed Consolidated Audit Trail

    The proposed Rule would require the plan sponsors to jointly 

provide to the Commission a report outlining how the sponsors would 

incorporate into the consolidated audit trail information with respect 

to: (1) Equity securities that



[[Page 32601]]



are not NMS securities; (2) debt securities; and (3) primary market 

transactions in equity securities that are not NMS securities, in NMS 

stocks, and in debt securities. The sponsors would be required to 

address, among other things, details for each order and reportable 

events that they would recommend requiring to be provided; which market 

participants would be required to provide the data; an implementation 

schedule; and a cost estimate. Thus, the exchanges and FINRA would need 

to, among other things, undertake an analysis of technological and 

computer system acquisitions and upgrades that would be required to 

incorporate such an expansion. The Commission preliminarily estimates 

that the one-time cost to the exchanges and FINRA to create and file 

with the Commission a report for expanding the scope of the 

consolidated audit trail would be approximately $1,751,550 for a one-

time cost of $116,770 per SRO.\375\

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    \375\ Commission staff estimates that each member would expend 

(200 Attorney hours x $305 per hour) + (50 Compliance Manager hours 

x $258 per hour) + (110 Programmer Analyst hours x $193 per hour) + 

(60 Business Analyst hours x $194 per hour) + (25 Outsourced Legal 

Counsel hours x $400 per hour) = $116,770 to create and file with 

the Commission a report for expanding the scope of the consolidated 

audit trail. See supra Section V.D.1.b and note 302.

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    Does this estimate accurately reflect the expenses, including SRO 

staff time and systems analyses, which SROs would incur in preparing 

the required report? Are there other costs components that should be 

considered in determining costs associated with preparing the required 

report? Please provide details on any additional costs that should be 

considered.

8. Other Costs

    Proposed Rule 613 would specifically require, for the receipt or 

origination of each order, information to be reported to the central 

repository with respect to the ultimate customer that generates the 

order. Specifically, members would be required to report to the central 

repository information about the beneficial owner of the account 

originating the order and the person exercising investment discretion 

for the account originating the order, if different from the beneficial 

owner, and each customer would be identified by a unique customer 

identifier. Thus, information about ``live'' orders, as well as overall 

order and execution information for a particular customer, would be 

available in the central repository. In recognition of the sensitivity 

of this data, the proposed Rule requires the NMS Plan to include 

policies and procedures, including standards, to be used by the plan 

processor to ensure the security and confidentiality of all information 

submitted to, and maintained by, the central repository.

    However, a potential cost could be incurred if the security and 

confidentiality of the information submitted to the central repository 

is breached, either by malfeasance or accident. In either case, if 

identifying information about customers and their trading is made 

public--contrary to the expectations and intentions of the customers--

the Commission preliminarily believes that this may have a negative 

effect on the securities markets. Specifically, investors may be less 

willing to allocate their capital to the securities markets if their 

expectation that their personal identifying and trading information 

will be adequately protected by the central repository is not met. 

Under these circumstances, there could be a reduction in the capital 

invested in the markets for NMS securities by investors, to the 

detriment of the U.S. securities markets overall.

    Proposed Rule 613 also would require that the NMS plan include 

policies and procedures, including standards, for the plan processor to 

use to ensure the integrity of the information submitted to the central 

repository. Specifically, the proposed Rule requires that the policies 

and procedures be designed to ensure the timeliness, accuracy, and 

completeness of the data provided to the central repository by the 

exchanges, FINRA and their members, and to require the rejection of 

data provided if the data does not meet validation parameters, and the 

re-transmission of such data. The Commission notes that, despite such 

safeguards for ensuring the integrity of the audit trail data, the 

information submitted by the exchanges, FINRA and their members could 

be inaccurate, either due to system or human error. If the reliability 

of the data is compromised, this could reduce the usefulness of the 

consolidated audit trail data for regulatory purposes.

    Are there any other non-tangible costs associated with potential 

breaches of the integrity or confidentiality of the data required to be 

submitted to the central repository that the Commission should 

consider?

9. Total Costs

    Based on the assumptions and resulting estimated costs discussed 

above, the Commission preliminarily estimates the initial aggregate 

cost the exchanges and FINRA would incur to comply with the proposed 

Rule, other than costs related to creating and operating the central 

repository, would be approximately $231 million,\376\ and ongoing 

aggregate annual costs would be approximately $77.7 million.\377\ In 

addition, the exchanges and FINRA would incur an initial aggregate cost 

of approximately $120 million to set up the central repository,\378\ 

with ongoing annual costs to operate the central repository of 

approximately $101 million.\379\ For SRO members that would make 

changes to their own order management and trading systems to comply 

with the proposed Rule,\380\ we estimate the initial aggregate one-time 

cost for implementation of the proposed Rule would be approximately 

$3.4 billion \381\ and aggregate ongoing annual costs would be 

approximately $1.7 billion.\382\ For SRO members that are



[[Page 32602]]



likely to rely on a third party to comply with the proposed Rule (such 

as their clearing broker),\383\ we estimate the initial aggregate one-

time cost for implementation of the proposed Rule would be 

approximately $287 million \384\ and ongoing annual costs would be 

approximately $253 million.\385\ Therefore, for all SROs and members, 

we estimate that the total one-time aggregate cost to implement the 

proposed Rule would be approximately $4 billion and the total ongoing 

aggregate annual costs would be approximately $2.1 billion.

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    \376\ This aggregate cost estimate includes the aggregate one-

time cost of preparing and filing the NMS plan ($3,503,100); the 

aggregate average one-time cost for each exchange and FINRA to 

synchronize clocks consistent with the proposed requirements 

($144,750); the aggregate average one-time cost for each exchange 

and FINRA to identify, collect and transmit the consolidated audit 

trail information to the central repository ($75 million); the 

aggregate average one-time cost for each exchange and FINRA to 

develop and implement surveillance systems, or enhance existing 

surveillance systems ($150 million); the aggregate one-time cost for 

each exchange and FINRA to file proposed rule changes to implement 

the provisions of the NMS plan with respect to their members 

($590,175); and the aggregate one-time cost to the exchanges and 

FINRA of jointly providing to the Commission a report outlining how 

the exchanges and FINRA would expand the scope of the consolidated 

audit trail ($1,751,550).

    \377\ This aggregate cost estimate includes the aggregate 

average ongoing annual cost to ensure that the plan is up to date 

and remains in compliance with the proposed Rule ($725,760); the 

aggregate average ongoing annual cost to synchronize clocks 

consistent with industry standards ($173,700); the aggregate average 

ongoing annual cost to evaluate the synchronization standards 

($92,880); the aggregate average ongoing annual cost to ensure that 

each exchange and FINRA is providing information in compliance with 

the proposed Rule ($37.5 million); and the aggregate average ongoing 

annual cost associated with enhanced surveillance ($39,159,000).

    \378\ See supra note 368.

    \379\ See supra notes 369 to 371 and accompanying text.

    \380\ We preliminarily estimate there are 1,114 of these broker-

dealers, including all clearing firms and alternative trading 

systems. See supra note 320.

    \381\ This aggregate cost estimate includes the aggregate 

average one-time cost for such members to identify, collect and 

transmit the consolidated audit trail information to the central 

repository ($3,342,000,000); and the aggregate average initial cost 

for such members to synchronize clocks consistent with the proposed 

requirements ($10,750,100).

    \382\ This aggregate cost estimate includes the aggregate 

average ongoing annual cost for such members to identify, collect 

and transmit the consolidated audit trail information to the central 

repository ($1,671,000,000); and the aggregate average ongoing 

annual cost for such members to annually evaluate the 

synchronization time standards and perform any necessary 

synchronization adjustments ($19,798,008).

    \383\ We preliminarily estimate there are 3,006 of these broker-

dealers, mainly including non-clearing broker-dealers. See supra 

note 327.

    \384\ This aggregate cost estimate includes the aggregate 

average initial cost for such members to identify, collect and 

transmit the consolidated audit trail information to the central 

repository ($258,125,220); and the aggregate average initial cost 

for such members to synchronize clocks consistent with the proposed 

requirements ($29,007,900).

    \385\ This aggregate cost estimate includes the aggregate 

average ongoing annual cost for such members to identify, collect 

and transmit the consolidated audit trail information to the central 

repository ($199,935,072); and the aggregate average ongoing annual 

cost for such members to annually evaluate the synchronization time 

standards and perform any necessary synchronization adjustments 

($53,422,632).

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C. Request for Comment



    The Commission requests general comment on the costs and benefits 

of proposed Rule 613 of Regulation NMS discussed above, as well as any 

costs and benefits not already described which could result from the 

proposed Rule. The Commission also requests data to quantify any 

potential costs or benefits.

    The Commission requests comment on what, if any, would be the 

impact of the proposed Rule on competition among the exchanges and 

other non-exchange market centers? If commenters believe there would be 

an impact on competition, please explain and quantify the costs or 

benefits of such impact. If commenters believe that there would be a 

cost, what steps could the Commission take to mitigate such costs?

    The Commission also requests comment on whether the requirements of 

the proposed Rule, such as the requirement to provide detailed 

information to the central repository on a real time basis, would have 

an impact on any form of legal trading activity engaged in by market 

participants, or the speed with which trading occurs. For example, 

would requiring additional information to be attached to an order when 

the order is routed from one member or exchange to another--such as the 

unique order identifier--impact the speed with which routing and 

trading occurs? If not, why not? If so, why? If there would be an 

impact, do commenters believe that the impact would be negative? Why or 

why not? Also, would the requirement to provide customer and order 

information to the central repository in real time impact market 

participant trading activity? If so, how so? If commenters believe the 

impact would provide a benefit, please explain and quantify. If 

commenters believe that the impact would impose a cost, please explain 

and quantify. For example, would market participants be hesitant to 

engage in certain legal trading activity because of a concern about 

providing customer and order information in real time? Would market 

participants shift their trading activity to products or markets that 

do not require the capture of customer information to avoid compliance 

with this requirement of the proposed Rule? If so, how should the 

Commission address those concerns? Please be specific in your 

responses. The Commission requests comment on any other changes to 

behavior that commenters believe may result from application of the 

proposed Rule. For example, do commenters believe that the proposal 

would cause illegal trading activity to shift to products or markets 

not covered by the proposed Rule? If so, should that impact the scope 

of the proposed Rule? If so, how so? If not, why not?



VII. Consideration of Burden on Competition and Promotion of 

Efficiency, Competition, and Capital Formation



    Section 3(f) of the Exchange Act requires the Commission, whenever 

it engages in rulemaking and is required to consider or determine 

whether an action is necessary or appropriate in the public interest, 

to consider, in addition to the protection of investors, whether the 

action would promote efficiency, competition, and capital 

formation.\386\ In addition, Section 23(a)(2) of the Exchange Act 

requires the Commission, when making rules under the Exchange Act, to 

consider the impact such rules would have on competition.\387\ Exchange 

Act Section 23(a)(2) prohibits the Commission from adopting any rule 

that would impose a burden on competition not necessary or appropriate 

in furtherance of the purposes of the Exchange Act. As discussed below, 

the Commission's preliminary view is that the proposed Rule should 

promote efficiency, competition, and capital formation.

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    \386\ 15 U.S.C. 78c(f).

    \387\ 15 U.S.C. 78w(a)(2).

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    Section 11A(a)(3)(B) of the Exchange Act provides in part that the 

Commission may, by rule, require SROs to act jointly with respect to 

matters as to which they share authority under the Exchange Act in 

regulating a national market system for securities.\388\ Proposed Rule 

613 would require all national securities exchanges and national 

securities associations to jointly submit to the Commission an NMS plan 

to create, implement, and maintain a consolidated audit trail for NMS 

securities. Under the proposal, pursuant to the NMS plan, and SRO rules 

adopted thereunder to implement the plan, national securities exchanges 

and national securities associations, as well as their members, would 

be required to provide detailed order and execution data to a central 

repository to populate a consolidated audit trail.\389\

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    \388\ See Section 11A(a)(3)(B) of the Exchange Act, 15 U.S.C. 

78k-1(a)(3)(B).

    \389\ See supra Section III.D. for a detailed description of the 

required data.

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A. Competition



    The Commission considered the impact of proposed Rule 613 on the 

national securities exchanges, national securities associations, and 

their members that trade NMS securities. The Commission begins its 

consideration of potential competitive impacts with observations of the 

current structure of the markets for trading NMS securities.

    The industry for the trading of NMS securities is a competitive 

one, with reasonably low barriers to entry and significant competition 

for order flow. The intensity of competition across trading platforms 

that trade NMS securities has increased dramatically in the past decade 

as a result of technological advances and regulatory changes. This 

increase in competition has resulted in decreases in market 

concentration, more competition among market centers, a proliferation 

of trading platforms competing for order flow, and decreases in trading 

fees.

    In addition, the Commission, within the past five years, has 

approved applications by BATS,\390\ Direct



[[Page 32603]]



Edge,\391\ Nasdaq,\392\ and C2 \393\ to become registered as national 

securities exchanges for trading equities, approved proposed rule 

changes by two existing exchanges--the ISE \394\ and CBOE \395\--to add 

cash equity trading facilities to their existing options business; and 

approved proposed rule changes by two existing exchanges--Nasdaq and 

BATS--to add options trading facilities to their existing cash equities 

business.\396\

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    \390\ See Securities Exchange Act Release No. 58375 (August 18, 

2008), 73 FR 49498 (August 21, 2008) (order approving BATS 

Exchange's application for registration as a national securities 

exchange).

    \391\ See Securities Exchange Act Release No. 61698 (March 12, 

2010), 75 FR 13151 (March 18, 2010) (order approving EDGA Exchange 

and EDGX Exchange's applications for registration as national 

securities exchanges).

    \392\ See Securities Exchange Act Release No. 53128 (January 13, 

2006), 71 FR 3550 (January 23, 2006) (File No. 10-131) (order 

approving Nasdaq's application for registration as a national 

securities exchange).

    \393\ See Securities Exchange Act Release No. 61152 (December 

10, 2009), 74 FR 66699 (December 16, 2009) (order approving C2 

Options Exchange's application for registration as a national 

securities exchange).

    \394\ See Securities Exchange Act Release No. 54528 (September 

28, 2006), 71 FR 58650 (October 4, 2006) (order approving rules to 

govern trading equities).

    \395\ See Securities Exchange Act Release No. 55389 (March 2, 

2007), 72 FR 10575 (March 8, 2007 (order approving CBOE Stock 

Exchange LLC as a facility of CBOE).

    \396\ See Securities Exchange Act Release Nos. 57478 (March 12, 

2008), 73 FR 14321 (March 18, 2008) (order approving rules governing 

the trading of options on the Nasdaq Options Market, LLC); and 61419 

(January 26, 2010), 75 FR 5157 (February 1, 2010) (order approving 

rules governing the trading of options on BATS Options Exchange, 

Inc.).

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    The Commission believes that competition among trading venues for 

NMS stocks has been facilitated by several Commission rules: Rule 611 

(the Order Protection Rule), which encourages quote-based competition 

between market centers; Rule 605, which empowers investors and brokers 

to compare execution quality statistics across trading venues; and Rule 

606, which enables customers to monitor the order routing practices. 

Similarly, there is rigorous competition among the options exchanges 

that has been facilitated by regulatory efforts. These include the move 

to multiple listing,\397\ the extension of the Commission's Quote Rule 

to options,\398\ the prohibition against trading outside of the 

national best bid and offer,\399\ the adoption of market structures on 

the floor-based exchanges that permit individual market maker 

quotations to be reflected in the exchange's quotation,\400\ and the 

Minimum Quoting Increment Pilot Program.\401\

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    \397\ See Securities Exchange Act Release No. 26870 (May 26, 

1989), 54 FR 23963 (June 5, 1989) (S7-25-87).

    \398\ See Securities Exchange Act Release No. 43591 (November 

17, 2000), 65 FR 75439 (December 1, 2000).

    \399\ See Securities Exchange Act Release No. 60405 (July 30, 

2009), 74 FR 39362 (August 6, 2009) (approved of Options Order 

Protection and Locked/Crossed Market Plan).

    \400\ See, e.g., Securities Exchange Act Release No. 47959 (May 

30, 2003), 68 FR 34441, 34442 (June 9, 2003) (SR-CBOE-2002-05) 

(adopting, among other things, amendments to incorporate firm quote 

requirements in CBOE's rules).

    \401\ On January 26, 2007, the then-existing six options 

exchanges implemented a pilot program to quote certain options 

series in thirteen classes in one-cent increments (``Minimum Quoting 

Increment Pilot Program''). Nasdaq became a participant in the 

Minimum Quoting Increment Pilot Program on March 31, 2008, when it 

commenced trading on its options platform, and BATS become a 

participant in the Pilot Program on February 26, 2010, when it 

commenced trading on BATS Options. Since 2007, the Minimum Quoting 

Increment Pilot Program has been extended and expanded several 

times. See, e.g., Securities Exchange Act Release Nos. 56276 (August 

17, 2007), 72 FR 47096 (August 22, 2007) (SR-CBOE-2007-98); 56567 

(September 27, 2007), 72 FR 56396 (October 3, 2007) (SR-Amex-2007-

96); 57579 (March 28, 2008), 73 FR 18587 (April 4, 2008) (SR-Nasdaq-

2008-026); 60711 (September 23, 2009), 74 FR 49419 (September 28, 

2009) (SR-NYSEArca-2009-44); and 61061 (November 24, 2009), 74 FR 

62857 (December 1, 2009) (SR-NYSEArca-2004-44).

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    The broker-dealer industry also is a highly competitive industry 

with low barriers to entry. Most trading activity is concentrated among 

several dozen large participants, with thousands of small participants 

competing for niche or regional segments of the market. The reasonably 

low barriers to entry for broker-dealers are evidenced, for example, by 

the fact that the average number of new broker-dealers entering the 

market each year between 2001 and 2008 was 389.\402\

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    \402\ This number is based on a Commission staff review of FOCUS 

Report filings reflecting registered broker-dealers from 2001 

through 2008. The number does not include broker-dealers that are 

delinquent on FOCUS Report filings. New registered broker-dealers 

for each year during the period from 2001 through 2008 were 

identified by comparing the unique registration number of each 

broker-dealer filed for the relevant year to the registration 

numbers filed for each year between 1995 and the relevant year.

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    There are approximately 5,178 registered broker-dealers, of which 

approximately 890 are small broker-dealers.\403\ To limit costs and 

make business more viable, the small participants often contract with 

bigger participants to handle certain functions, such as clearing and 

execution, or to update their technology. Larger broker-dealers often 

enjoy economies of scale over smaller broker-dealers and compete with 

each other to service the smaller broker-dealers, who are both their 

competitors and customers.

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    \403\ These numbers are based on a review of 2007 and 2008 FOCUS 

Report filings reflecting registered broker-dealers, and discussions 

with SRO staff. The number does not include broker-dealers that are 

delinquent on FOCUS Report filings.

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    In the Commission's preliminary judgment, the costs of proposed 

Rule 613 would not impose any burden on competition not necessary or 

appropriate in furtherance of the purposes of the Exchange Act. In 

industries characterized by easy entry and intense competition, the 

viability of some of the competitors may be sensitive to regulatory 

costs. Nonetheless, the Commission preliminarily believes that the 

overall marketplace for NMS securities would remain highly competitive, 

despite the costs associated with implementing proposed new Rule 613, 

even if those costs influence the entry or exit decisions of some 

individual broker-dealer firms.

    As discussed above in Sections V and VI, the Commission 

acknowledges that the proposal would entail significant costs of 

implementation. In particular, requiring national securities exchanges, 

national securities associations, and their members to capture the 

required information and provide it to the central repository in a 

uniform format, in particular information that is not currently 

captured under the existing audit trail or other regulatory 

requirements, would likely require significant one-time initial 

expenses to enhance or modify existing order handling, trading, and 

other systems. In addition, national securities exchanges and national 

securities associations would need to enhance or create new 

surveillance procedures to use the consolidated audit trail 

information. Preliminarily, the Commission does not believe that these 

implementation expenses would impose an undue burden on competition 

among SROs or among other market participants. The Commission 

preliminarily believes that the requirements associated with the 

proposed Rule are necessary and appropriate, and would apply uniformly 

to all national securities exchanges, national securities associations 

and their members, and thus would not result in an undue burden on 

competition.

    As discussed above in Section II, the approach of proposed new Rule 

613 would advance the purposes of the Exchange Act in a number of 

significant ways. The Commission preliminarily believes that proposed 

Rule 613 should aid each of the exchanges and FINRA in carrying out its 

statutory obligation to be organized and have the capacity to comply, 

and enforce compliance by its members, with its rules, and with the 

federal securities laws, rules, and regulations. Likewise, the 

Commission believes that proposed Rule 613 should aid the Commission in 

fulfilling its statutory obligation to oversee the exchanges and 

associations, and to enforce compliance by the members of



[[Page 32604]]



exchanges and associations with the respective exchange's or 

association's rules, and the federal securities laws and regulations. 

The proposed consolidated audit trail also would aid the Commission in 

its efforts to limit the manipulation of security prices, and to limit 

the use of manipulative or deceptive devices in the purchase or sale of 

a security. By potentially decreasing the opportunities for illegal 

activity and market manipulation, the proposed Rule should promote fair 

competition among market participants on the basis of effective 

regulation. Further, by imposing uniform audit trail requirements on 

all SROs and their members, and thus removing any incentive to compete 

based on regulation (or lack thereof), the Commission preliminarily 

believes that the proposed Rule would allow SROs and their members to 

more effectively compete on other terms such as the services provided, 

price, and available liquidity.

    Based on the analysis above, the Commission preliminarily believes 

that the proposal would not impose any burden on competition not 

necessary or appropriate in furtherance of the purposes of the Exchange 

Act. However, we seek comment on the impact of the proposed Rule on 

competition. The Commission requests comment on what, if any, would be 

the impact of the proposed Rule on competition among the exchanges and 

other non-exchange market centers. If commenters believe there would be 

an impact on competition, please explain and quantify the costs or 

benefits of such impact. For example, as noted above, exchanges would 

have access through the central repository to trading information about 

their competitors' customers. Do commenters believe that access to this 

information would have an impact on competition among exchanges? If so, 

please explain what the potential impact could be, and whether you 

believe that such impact would be an adverse. If so, please further 

address what, if any, steps the Commission should take in the proposed 

Rule to address such concerns.



B. Capital Formation



    As discussed above in Section II, proposed Rule 613 is intended to 

enhance the ability of the SROs and the Commission to more efficiently 

and in a more timely manner monitor trading in NMS securities across 

all markets and market participants, which should further the ability 

of the SROs and the Commission staff to effectively enforce SRO rules 

and federal securities laws, rules and regulations. For example, the 

proposed consolidated audit trail would ensure that all orders are 

tracked from origination to execution or cancellation. Further, the 

consolidated audit trail would provide information on any modifications 

or routing decisions made with regard to an order. The Commission 

preliminarily believes that the proposed audit trail information would 

greatly enhance the ability of its staff to effectively monitor and 

surveil the securities markets. This enhanced ability of the SROs and 

Commission staff to enforce the federal securities laws, rules, and 

regulations should help ensure that market participants that engage in 

fraudulent or manipulative activities are identified more swiftly, 

which should deter future attempts to do the same. In general, the 

faster fraudulent or manipulative activity is identified and action is 

taken, the more likely ill-gotten gains will remain available to pay 

penalties or compensate victims.

    The Commission preliminarily believes that by enhancing the SROs' 

and the Commission's ability to enforce the federal securities laws, 

rules and regulations, proposed Rule 613 could help maintain or 

increase investor confidence in the fairness of the securities markets. 

Investor confidence may increase as the potential for the detection of 

illegal activity is increased and the risk of investment loss due to 

undetected illegal activity decreases. Bolstering investor confidence 

in the fairness of the securities markets may increase the level of 

investment, which could promote capital formation to the extent that 

the increase is allocated efficiently. This would promote capital 

formation because as capital is better allocated, issuers with the most 

productive capital needs may be better able to raise capital.



C. Efficiency



    Proposed Rule 613 would require the creation and maintenance of a 

consolidated audit trail, which the Commission preliminarily believes 

would greatly enhance the ability of SRO staff to effectively monitor 

and surveil the securities markets, and thus detect illegal activity in 

a more timely manner, whether on one market or across markets. With an 

audit trail designed to help the SROs reconstruct and analyze time-

sequenced order and trading data, the SROs could more quickly 

investigate the nature and causes of unusual market movements or 

trading activity and initiate investigations and take regulatory 

actions where warranted. An increase in detected and prosecuted 

violations of the securities laws, rules, and regulations would likely 

act as deterrent to future violations. Likewise, the ability of the 

Commission to better understand unusual market activity, such as during 

a period of intense volatility, could lead to better oversight, or more 

focused regulation where warranted, of the causes of such activity. For 

example, the possibility of more prompt detection of illegal activity 

would likely deter future abusive or manipulative trading activity from 

being used to manipulate market prices to artificial levels or by 

accelerating a declining market in one or several securities. Thus, the 

Commission preliminarily believes that proposed Rule 613 would help to 

ensure that markets function efficiently. As a result, the Commission 

preliminarily believes that the proposed consolidated audit trail would 

help promote the efficient functioning of markets, which should help 

enhance the protection of investors and further the public interest.

    Further, the Commission preliminarily believes that the proposed 

Rule, by creating one central repository to which each national 

securities exchange, national securities association, and their members 

would be required to provide the same data in the same format, could 

reduce or eliminate the need for each individual SRO to have it own 

disparate requirements. Elimination of often inconsistent regulation on 

members would promote efficiency because members would no longer be 

required to submit disparate data to multiple regulators pursuant to 

multiple, and sometimes inconsistent, SRO and Commission rules.

    The Commission requests comment on all aspects of this analysis 

and, in particular, on whether the proposed consolidated audit trail 

would place a burden on competition not necessary or appropriate in 

furtherance of the purposes of the Exchange Act, as well as the effect 

of the proposal on efficiency, competition, and capital formation. The 

Commission also requests comment on the impact, if any, of the proposed 

Rule on investors' trading activities. Would the proposed Rule impact 

investors' incentives to engage in certain types of legal trading in 

NMS securities, or other products, on the exchanges or OTC markets that 

would be subject to the proposed Rule? If so, why, and what impact 

would that have on the competitiveness of the U.S. markets? Would the 

proposed Rule impact market participants' incentives to engage in 

certain types of illegal trading activity in products other than NMS 

securities or in other markets? If so, how so, and what if any steps 

should



[[Page 32605]]



the Commission take to address the expected changes in behavior? 

Commenters are requested to provide empirical data and other factual 

support for their views.



VIII. Consideration of Impact on the Economy



    For purposes of the Small Business Regulatory Enforcement Fairness 

Act of 1996, or ``SBREFA,'' \404\ the Commission must advise the Office 

of Management and Budget as to whether the proposed regulation 

constitutes a ``major'' rule. Under SBREFA, a rule is considered 

``major'' where, if adopted, it results or is likely to result in: (1) 

An annual effect on the economy of $100 million or more (either in the 

form of an increase or a decrease); (2) a major increase in costs or 

prices for consumers or individual industries; or (3) significant 

adverse effect on competition, investment or innovation.

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    \404\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified 

in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 

601).

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    The Commission requests comment on the potential impact of proposed 

Rule 613 on the economy on an annual basis, on the costs or prices for 

consumers or individual industries, and on competition, investment or 

innovation. Commenters are requested to provide empirical data and 

other factual support for their view to the extent possible.



IX. Initial Regulatory Flexibility Act Analysis



    The Regulatory Flexibility Act (``RFA'') \405\ requires Federal 

agencies, in promulgating rules, to consider the impact of those rules 

on small entities. Section 603(a) \406\ of the Administrative Procedure 

Act,\407\ as amended by the RFA, generally requires the Commission to 

undertake a regulatory flexibility analysis of all proposed rules, or 

proposed rule amendments, to determine the impact of such rulemaking on 

``small entities.'' \408\

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    \405\ 5 U.S.C. 601 et seq.

    \406\ 5 U.S.C. 603(a).

    \407\ 5 U.S.C. 551 et seq.

    \408\ The Commission has adopted definitions for the term small 

entity for the purposes of Commission rulemaking in accordance with 

the RFA. Those definitions, as relevant to this proposed rulemaking, 

are set forth in Rule 0-10, 17 CFR 240.0-10. See Securities Exchange 

Act Release No. 18451 (January 28, 1982), 47 FR 5215 (February 4, 

1982) (File No. AS-305).

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    Proposed Rule 613 of Regulation NMS would require the national 

securities exchanges and national securities associations to jointly 

develop and file with the Commission a NMS plan to implement and 

maintain a consolidated audit trail. Pursuant to such NMS plan, and 

rules that would be adopted by the SROs to implement the plan, national 

securities exchanges and national securities associations, as well as 

their members, would be required to provide data to a central 

repository to populate a consolidated audit trail.\409\

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    \409\ See proposed Rule 613(c) and supra Sections III.B. and 

III.D.

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A. Reasons for the Proposed Rule



    The Commission preliminarily believes that with today's electronic, 

interconnected markets, there is a heightened need for regulators to 

have efficient access to a more robust and effective cross-market order 

and execution tracking system. As discussed above, currently many of 

the national securities exchanges and FINRA have audit trail rules and 

systems to track information relating to orders received and executed, 

or otherwise handled, in their respective markets. While the 

information gathered from these audit trail systems aids the SRO and 

Commission staff in their regulatory responsibility to surveil for 

compliance with SRO rules and the federal securities laws and 

regulations, the Commission preliminarily believes that existing audit 

trails are limited in their scope and effectiveness in varying 

ways.\410\ In addition, while the SRO and Commission staff also 

currently receives information about orders and/or trades through the 

EBS system, Rule 17a-25,\411\ and from equity cleared reports, the 

information is limited, to varying degrees, in detail and scope.\412\

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    \410\ See supra Section II.A.

    \411\ 17 CFR 240.17a-25.

    \412\ See supra Sections I.A and I.B. for a description of the 

EBS system, Rule 17a-25, and equity cleared reports.

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    The creation and implementation of a consolidated audit trail, as 

proposed, would enable regulators to better fulfill their regulatory 

responsibilities to monitor for and investigate potentially illegal 

activity in the NMS for securities in a more timely fashion, whether on 

one market or across markets. A consolidated audit trail also would 

enhance the ability of the Commission in investigating and preparing 

market reconstructions, and in understanding the causes of unusual 

market activity. Further, timely pursuit of potential violations can be 

important in seeking to freeze and recover any profits received from 

illegal activity.



B. Objectives and Legal Basis



    Each national securities exchange and national securities 

association must be organized and have the capacity to comply, and 

enforce compliance by its members, with its rules, and with the federal 

securities laws, rules, and regulations.\413\ Likewise, the Commission 

oversees the exchanges and associations,\414\ and enforces compliance 

by the members of exchanges and associations with the respective 

exchange's or association's rules, and the federal securities laws and 

regulations.\415\ The Commission preliminarily believes that the 

exchanges, FINRA and the Commission itself could more effectively and 

efficiently fulfill these statutory obligations to oversee and regulate 

the NMS if the SROs and the Commission had direct access to more 

robust, and timely, order and execution information across all markets.

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    \413\ See, e.g., Sections 6(b)(1), 19(g)(1) and 15A(b)(2) of the 

Exchange Act, 15 U.S.C. 78(f)(b)(1), 78s(g)(1), and 78o-3(b)(2).

    \414\ See, e.g., Sections 2, 6(b), 15A(b), and 19(h)(1) of the 

Exchange Act, 15 U.S.C. 78(b), 15 U.S.C. 78(f)(6), 15 U.S.C. 78o-

3(b), and 15 U.S.C. 78(h)(1).

    \415\ See, e.g., 19(h)(1) of the Exchange Act, 15 U.S.C. 

78(h)(1).

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    The Commission is proposing Rule 613 under the authority set forth 

in Exchange Act Sections 2, 3(b), 5, 6, 11, 11A, 15, 15A, 17(a) and 

(b), 19, 23(a), and 36 thereof, 15 U.S.C. 78b, 78c(b), 78e, 78f, 78k-1, 

78o, 78o-3, 78q(a) and (b), 78s, 78w(a), and 78mm.



C. Small Entities Subject to the Proposed Rule



1. National Securities Exchanges and National Securities Associations

    The proposed Rule would apply to national securities exchanges 

registered with the Commission under Section 6 of the Exchange Act and 

national securities associations registered with the Commission under 

Section 15A of the Exchange Act. None of the national securities 

exchanges registered under Section 6 of the Exchange Act or national 

securities associations registered with the Commission under Section 

15A of the Exchange Act that would be subject to the proposed Rule are 

``small entities'' for purposes of the RFA.\416\

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    \416\ See 17 CFR 240.0-10(e). Paragraph (e) of Rule 0-10 states 

that the term ``small business,'' when referring to an exchange, 

means any exchange that has been exempted from the reporting 

requirements of Rule 601 of Regulation NMS, 17 CFR 242.601, and is 

not affiliated with any person (other than a natural person) that is 

not a small business or small organization as defined in Rule 0-10. 

Under this standard, none of the exchanges subject to the proposed 

Rule is a ``small entity'' for the purposes of the RFA. FINRA is not 

a small entity as defined by 13 CFR 121.201.

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2. Broker-Dealers

    Proposed Rule 613(g) would apply to all broker-dealers that are 

members of a national securities exchange or national securities 

association. Commission rules



[[Page 32606]]



generally define a broker-dealer as a small entity for purposes of the 

Exchange Act and the Regulatory Flexibility Act if the broker-dealer 

had a total capital of less than $500,000 on the date in the prior 

fiscal year as of which its audited financial statements were prepared, 

and it is not affiliated with any person (other than a natural person 

that is not a small entity).\417\

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    \417\ See 17 CFR 240.0-10(c).

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    The Commission estimates that as of December 31, 2008, there were 

approximately 890 Commission-registered broker-dealers that would be 

considered small entities for purposes of the statute. Each of these 

broker-dealers, assuming that they are all members of one or more 

national securities exchange or FINRA, would be required to comply with 

the proposed Rule.

D. Reporting, Record Keeping, and Other Compliance Requirements

    Proposed Rule 613(g)(2) would impose new reporting and record 

keeping requirements on small broker-dealers. While certain elements of 

order and execution information that such small broker-dealers would be 

required to collect and submit to the central repository are already 

required to be maintained by broker-dealers pursuant to Rules 17a-3 and 

17a-25 under the Exchange Act or the SRO audit trail rules, the 

proposed Rule would require the collection of additional information 

that is not required to be collected under these rules. Further, small 

broker-dealers would be responsible for complying with the proposed 

Rule's requirements for reporting to the central repository the 

required order and transaction data.

    The proposed Rule would require that most of the information 

collected be reported on a real time basis, rather than on an ``as 

requested'' basis, and that all required information be submitted in a 

uniform format. Accordingly, the Commission preliminarily believes that 

even those small broker-dealers that already have systems in place for 

submitting order and transaction information to regulators upon 

request, or to comply with existing SRO audit trail rules, would need 

to make modifications to their existing order handling and trading 

systems to comply with the proposed Rule, or rely on outside vendors to 

provide a functionality that would provide information to the central 

repository.



E. Duplicative, Overlapping, or Conflicting Federal Rules



    As stated above, broker-dealers are subject to record keeping and 

reporting requirements under Rules 17a-3 and 17a-25 under the Exchange 

Act. Rule 17a-3 requires that broker-dealers maintain records that 

would capture some of the same information required to be collected and 

submitted pursuant to the proposed Rule.\418\ Also, as part of the 

Commission's existing EBS system, pursuant to Rule 17a-25 under the 

Exchange Act, the Commission requires registered broker-dealers to keep 

records of some of the information that would be captured by proposed 

Rule 613.\419\

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    \418\ See 17 CFR 240.17a-3. Pursuant to Rule 17a-3, broker-

dealers are, for example, required to maintain the following 

information that would be captured by the proposed rule: Customer 

name and address; time an order was received; and price of 

execution.

    \419\ See 17 CFR 240.17a-25. Pursuant to Rule 17a-25, broker-

dealers are, for example, required to maintain the following 

information with respect to customer orders that would be captured 

by the proposed Rule, and provide it to the Commission upon request: 

Date on which the transaction was executed; account number; 

identifying symbol assigned to the security; transaction price; the 

number of shares or option contracts traded and whether such 

transaction was a purchase, sale, or short sale, and if an option 

transaction, whether such was a call or put option; the clearing 

house number of such broker or dealer and the clearing house numbers 

of the brokers or dealers on the opposite side of the transaction; 

prime broker identifier; the customer's name and address; the 

customer's tax identification number; and other related account 

information.

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    However, data collected pursuant to Rules 17a-3 and 17a-25 is 

limited in scope and is provided to the Commission only upon request. 

The proposed Rule would require the collection of significantly more 

information \420\ and would require that most of the information about 

orders and executions be provided to the central repository on a real 

time basis, not merely be stored and provided upon request. Thus, the 

Commission preliminarily believes that while these Federal rules 

overlap with certain requirements of the proposed Rule, the scope and 

purpose of the proposed Rule is more expansive than what is currently 

required and will more efficiently provide regulators with the 

information needed to effectively surveil trading activity across 

markets.

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    \420\ Such additional information would include: A unique 

customer identifier for each customer; a unique identifier that 

would attach to the order at the time the order is received or 

originated by the member and remain with the order through the 

process of routing, modification, cancellation, and execution (in 

whole or in part); a unique identifier of the broker-dealer 

receiving or originating the order; the unique identifier of the 

branch office and registered representative receiving or originating 

the order; the date on which the order is routed; time at which the 

order is routed (in milliseconds); and if the order is executed, in 

whole or in part, the account number for any subaccounts to which 

the execution is allocated; the unique order identifier of any 

contra-side order(s); and the amount of a commission, if any, paid 

by the customer, and the unique identifier of the broker-dealer(s) 

to whom the commission is paid.

---------------------------------------------------------------------------



F. Significant Alternatives



    Pursuant to 3(a) of the RFA, the Commission must consider the 

following types of alternatives: (1) The establishment of differing 

compliance or reporting requirements or timetables that take into 

account the resources available to small entities; (2) clarification, 

consolidation, or simplification of compliance and reporting 

requirements under the Rule for small entities; (3) the use of 

performance rather than design standards; and (4) and exemption from 

coverage of the proposed Rule, or any part thereof, for small entities.

    The Commission has considered whether it would more be more cost 

effective to enhance existing systems to achieve the proposed Rule's 

objective, rather than create a central repository. For example, the 

Commission considered expanding the scope of the information collected 

by existing audit trails, the EBS system, and/or Rule 17a-25, but 

determined that this approach would not result in the creation of a 

comprehensive consolidated audit trail. Under such an approach, SROs 

would still need to check multiple repositories of data to gather 

information about trading activity occurring across markets. Further, 

the goal of capturing data in a uniform format would be complicated if 

data were collected by multiple repositories. In addition, this 

approach would not resolve concerns over how long it takes to obtain 

data when it is not available in real time, but only required to be 

provided upon request. Without the centralization of data in a uniform 

electronic format, the Commission preliminarily believes that the goals 

of the proposed Rule could not be achieved.

    The Commission preliminarily believes that proposing a new uniform 

audit trail rule that would apply equally across all SROs and their 

members would be more efficient and effective than requiring each SRO 

to separately amend and enhance its existing order audit trail or EBS 

rules and systems, and amending Rule 17a-25. The scope of the proposed 

audit trail--requiring each member and SRO to report the same 

information for each order, for each reportable event, in a uniform 

format, in real time, across all markets--is fundamentally different 

than what is collected under existing order audit trails, the EBS 

system, and Rule 17a-25.

    The Commission also has considered allowing certain small broker-

dealers to submit certain trading data in a manual,



[[Page 32607]]



rather than an electronic, format.\421\ However, the Commission 

preliminarily does not believe that the intent and objectives of 

proposed Rule 613 could be achieved if small broker-dealers are subject 

to differing compliance or reporting requirements, such as manual 

reporting of data, or timetables. The Commission preliminarily believes 

that to be effective the consolidated audit trail should contain order 

and execution information from all broker-dealers, including small 

broker-dealers, in a uniform electronic format. Without this 

information, the SROs and the Commission would not have a complete and 

timely cross-market audit trail to utilize in their regulatory 

oversight of small broker-dealers, their customers, and the securities 

markets. Further, the Commission preliminarily believes that the 

timetable contained in the proposed Rule, which would give brokers-

dealers two years after effectiveness of the NMS plan to implement the 

proposed requirements to collect and report the required information to 

the central repository, would allow small broker-dealers sufficient 

time to modify existing systems, or procure third party functionality, 

to comply with the proposed Rule.\422\

---------------------------------------------------------------------------



    \421\ See 17a-25 Adopting Release, supra note 20, at 35839-

35840.

    \422\ See supra notes 326-330 and accompanying text and notes 

356-358 and accompanying text.

---------------------------------------------------------------------------



    Further, the Commission preliminarily believes that it has drafted 

the proposed Rule to be as straightforward as possible to achieve its 

objectives. Any simplification, consolidation or clarification of the 

Rule should occur for all entities, not just small broker-dealers. The 

Commission does not propose to dictate for entities of any size any 

particular design standards (e.g., technology) that must be employed to 

achieve the objectives of the proposed Rule. However, in order to 

provide consistent, comparable data to the central repository, the 

nature of the information collected is a design standard.

    The Commission would be able to rely on its exemptive authority 

under Section 36 of the Exchange Act to grant relief, when necessary, 

to small broker-dealers from the requirements of the proposed Rule. The 

Commission preliminarily believes that a wholesale exemption from the 

proposed Rule for small broker-dealers, however, would make it harder 

for the Commission and SROs to recognize the anticipated benefits of 

the consolidated audit trail.



G. Solicitation of Comments



    The Commission invites commenters to address whether the proposed 

Rule would have a significant economic impact on a substantial number 

of small entities, and, if so, what would be the nature of any impact 

on small entities. The Commission requests that commenters provide 

empirical data to support the extent of such impact.



X. Statutory Authority



    Pursuant to the Exchange Act and particularly, Sections 2, 3(b), 5, 

6, 11A, 15, 15A, 17(a) and (b), 19, and 23(a) thereof, 15 U.S.C. 78b, 

78c(b), 78e, 78f, 78k-1, 78o, 78o-3, 78q(a) and (b), 78s and 78w(a), 

the Commission proposes Rule 613 of Regulation NMS, as set forth below.



Text of Proposed Rule



List of Subjects in 17 CFR Part 242



    Brokers, Reporting and recordkeeping requirements, Securities.



    In accordance with the foregoing, Title 17, Chapter II, of the Code 

of Federal Regulations is proposed to be amended as follows.



PART 242--REGULATIONS M, SHO, ATS, AC, AND NMS AND CUSTOMER MARGIN 

REQUIREMENTS FOR SECURITY FUTURES



    1. The authority citation for part 242 continues to read as 

follows:



    Authority:  15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 

78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 

78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 

80a-37.



    2. Add Sec.  242.613 to read as follows:





Sec.  242.613  Consolidated Audit Trail.



    (a) Creation of a National Market System Plan Governing a 

Consolidated Audit Trail.

    (1) Each national securities exchange and national securities 

association shall jointly file on or before [90 days from approval of 

this rule] a national market system plan to govern the creation, 

implementation, and maintenance of a consolidated audit trail and 

central repository as required by this section.

    (2) The national market system plan, or any amendment thereto, 

filed pursuant to this section shall be filed with the Commission 

pursuant to Sec.  242.608.

    (3) The national market system plan submitted pursuant to this 

section shall require each national securities exchange and national 

securities association to:

    (i) By two months after effectiveness of the national market system 

plan jointly (or under the governance structure described in the plan) 

select a person to be the plan processor;

    (ii) By four months after effectiveness of the national market 

system plan synchronize their business clocks and by four months after 

effectiveness of the national market system plan require members of 

each such exchange and association to synchronize their business clocks 

in accordance with paragraph (d) of this section;

    (iii) By one year after effectiveness of the national market system 

plan provide to the central repository the data specified in paragraph 

(c) of this section;

    (iv) By fourteen months after effectiveness of the national market 

system plan implement a new or enhanced surveillance system(s) as 

required by paragraph (f) of this section; and

    (v) By two years after effectiveness of the national market system 

plan require members of each such exchange and association to provide 

to the central repository the data specified in paragraph (c) of this 

section.

    (4) Each national securities exchange and national securities 

association shall be a sponsor of the national market system plan 

submitted pursuant to this section and approved by the Commission.

    (5) No national market system plan filed pursuant to this section, 

or any amendment thereto, shall become effective unless approved by the 

Commission or otherwise permitted in accordance with the procedures set 

forth in Sec.  242.608.

    (b) Operation and Administration of the National Market System 

Plan.

    (1) The national market system plan submitted pursuant to this 

section shall include a governance structure to ensure fair 

representation of the plan sponsors, and administration of the central 

repository, including the selection of the plan processor.

    (2) The national market system plan submitted pursuant to this 

section shall include a provision addressing the requirements for the 

admission of new sponsors of the plan and the withdrawal of existing 

sponsors from the plan.

    (3) The national market system plan submitted pursuant to this 

section shall include a provision addressing the percentage of votes 

required by the plan sponsors to effectuate amendments to the plan.

    (4) The national market system plan submitted pursuant to this 

section shall include a provision addressing the manner in which the 

costs of operating the central repository will be allocated among the 

national securities exchanges



[[Page 32608]]



and national securities associations that are sponsors of the plan, 

including a provision addressing the manner in which costs will be 

allocated to new sponsors to the plan.

    (5) The national market system plan submitted pursuant to this 

section shall require the appointment of a Chief Compliance Officer to 

regularly review the operation of the central repository to assure its 

continued effectiveness in light of market and technological 

developments, and make any appropriate recommendations for enhancements 

to the nature of the information collected and the manner in which it 

is processed.

    (c) Data Collection. (1) The national market system plan submitted 

pursuant to this section shall provide for an accurate, time-sequenced 

record of orders beginning with the receipt or origination of an order 

by a member of a national securities exchange or national securities 

association, and further documenting the life of the order through the 

process of routing, modification, cancellation, and execution (in whole 

or in part) of the order.

    (2) The national market system plan submitted pursuant to this 

section shall require each national securities exchange, national 

securities association, and member to collect and provide to the 

central repository the information required by paragraph (c)(7) of this 

section in a uniform electronic format.

    (3) The national market system plan submitted pursuant to this 

section shall require each national securities exchange, national 

securities association, and member to collect and provide to the 

central repository the information required by paragraphs (c)(7)(i) 

through (v) of this section on a real time basis.

    (4) The national market system plan submitted pursuant to this 

section shall require each national securities exchange, national 

securities association, and member to collect and provide to the 

central repository the information required by paragraphs (c)(7)(vi) 

and (vii) of this section promptly after the national securities 

exchange, national securities association, or member receives the 

information, but in no instance later than midnight of the day that the 

reportable event occurred or the national securities exchange, national 

securities association, or member receives such information.

    (5) The national market system plan submitted pursuant to this 

section shall require each national securities exchange and its members 

to collect and provide to the central repository the information 

required by paragraph (c)(7) of this section for each NMS security 

registered or listed for trading on such exchange or admitted to 

unlisted trading privileges on such exchange.

    (6) The national market system plan submitted pursuant to this 

section shall require each national securities association and its 

members to collect and provide to the central repository the 

information required by paragraph (c)(7) of this section for each NMS 

security for which transaction reports are required to be submitted to 

the association.

    (7) The national market system plan submitted pursuant to this 

section shall require each national securities exchange, national 

securities association, and any member of such exchange or association 

to collect and electronically provide to a central repository details 

for each order and each reportable event, including, but not limited 

to, the following information:

    (i) For the original receipt or origination of the order:

    (A) Information of sufficient detail to identify the customer;

    (B) A unique customer identifier for each customer;

    (C) Customer account information;

    (D) A unique identifier that will attach to the order at the time 

the order is received or originated by the member and remain with the 

order through the process of routing, modification, cancellation, and 

execution (in whole or in part);

    (E) The unique identifier of the broker-dealer receiving or 

originating the order;

    (F) The unique identifier of the branch office and registered 

representative receiving or originating the order;

    (G) Date of order receipt or origination;

    (H) Time of order receipt or origination (in milliseconds); and

    (I) Material terms of the order.

    (ii) For the routing of an order, the following information:

    (A) The unique order identifier;

    (B) Date on which the order is routed;

    (C) Time at which the order is routed (in milliseconds);

    (D) The unique identifier of the broker-dealer or national 

securities exchange routing the order;

    (E) The unique identifier of the broker-dealer or national 

securities exchange receiving the order;

    (F) If routed internally at the broker-dealer, the identity and 

nature of the department or desk to which an order is routed; and

    (G) Material terms of the order.

    (iii) For the receipt of an order, the following information:

    (A) The unique order identifier;

    (B) Date on which the order is received;

    (C) Time at which the order is received (in milliseconds);

    (D) The unique order identifier of the broker-dealer or national 

securities exchange receiving the order;

    (E) The unique identifier of the broker-dealer or national 

securities exchange routing the order; and

    (F) Material terms of the order.

    (iv) If the order is modified or cancelled, the following 

information:

    (A) Date the modification or cancellation is received or 

originated;

    (B) Time the modification or cancellation is received or originated 

(in milliseconds);

    (C) Price and remaining size of the order, if modified;

    (D) Other changes in material terms of the order, if modified; and

    (E) Identity of the person giving the modification or cancellation 

instruction.

    (v) If the order is executed, in whole or in part, the following 

information:

    (A) The unique order identifier;

    (B) Date of execution;

    (C) Time of execution (in milliseconds);

    (D) Execution capacity (principal, agency, riskless principal);

    (E) Execution price and size;

    (F) The unique identifier of the national securities exchange or 

broker-dealer executing the order; and

    (G) Whether the execution was reported pursuant to an effective 

transaction reporting plan or the Options Price Reporting Authority 

Plan.

    (vi) If the order is executed, in whole or in part:

    (A) The account number for any subaccounts to which the execution 

is allocated (in whole or part);

    (B) The unique identifier of the clearing broker or prime broker, 

if applicable;

    (C) The unique order identifier of any contra-side order(s);

    (D) Special settlement terms, if applicable;

    (E) Short sale borrow information and identifier; and

    (F) The amount of a commission, if any, paid by the customer, and 

the unique identifier of the broker-dealer(s) to whom the commission is 

paid.

    (vii) If the execution is cancelled, a cancelled trade indicator.

    (8) All plan sponsors and their members shall use the same unique 

customer identifier and unique broker-dealer identifier for each 

customer and broker-dealer.

    (d) Clock Synchronization. The national market system plan 

submitted pursuant to this section shall require



[[Page 32609]]



each national securities exchange, national securities association, and 

member of such exchange or association subject to this section to:

    (1) Synchronize on its business clocks that are used for the 

purposes of recording the date and time of any reportable event that 

must be reported pursuant to this section to the time maintained by the 

National Institute of Standards and Technology, consistent with 

industry standards; and

    (2) Evaluate annually the synchronization standard to determine 

whether it should be shortened, consistent with changes in industry 

standards.

    (e) Central Repository.

    (1) The national market system plan submitted pursuant to this 

section shall provide for the creation and maintenance of a central 

repository. Such central repository shall be responsible for the 

receipt, consolidation, and retention of all data submitted pursuant to 

this section.

    (2) Each national securities exchange, national securities 

association, and the Commission shall have access to the central 

repository, including all systems operated by the central repository, 

and access to and use of the data reported to and consolidated by the 

central repository under paragraph (c) of this section, for the purpose 

of performing its respective regulatory and oversight responsibilities 

pursuant to the federal securities laws, rules, and regulations. The 

national market system plan submitted pursuant to this section shall 

provide that such access to and use of such data by each national 

securities exchange, national securities association, and the 

Commission for the purpose of performing its regulatory and oversight 

responsibilities pursuant to the federal securities laws, rules, and 

regulations shall not be limited.

    (3) The national market system plan submitted pursuant to this 

section shall include a provision requiring the creation and 

maintenance by the central repository of a method of access to the 

consolidated data that includes search and reporting functions.

    (4) The national market system plan submitted pursuant to this 

section shall include policies and procedures, including standards, to 

be used by the plan processor to:

    (i) Ensure the security and confidentiality of all information 

submitted to the central repository. All plan sponsors and their 

employees, as well as all employees of the central repository, shall 

agree to use appropriate safeguards to ensure the confidentiality of 

such data and shall agree not to use such data for any purpose other 

than surveillance and regulatory purposes. Nothing in this paragraph 

(i) shall be construed to prevent a plan sponsor from using the data 

that it submits to the central repository for regulatory, surveillance, 

commercial, or other purposes as otherwise permitted by applicable law, 

rule, or regulation;

    (ii) Ensure the timeliness, accuracy, and completeness of the data 

provided to the central repository pursuant to paragraph (c) of this 

section;

    (iii) Require the rejection of data provided to the central 

repository pursuant to paragraph (c) of this section that does not meet 

these validation parameters and the re-transmission of corrected data; 

and

    (iv) Ensure the accuracy of the consolidation by the plan processor 

of the data provided to the central repository pursuant to paragraph 

(c) of this section.

    (5) The national market system plan submitted pursuant to this 

section shall require the central repository to collect and retain on a 

current and continuing basis and in a format compatible with the 

information collected pursuant to paragraph (c)(7) of this section;

    (i) The national best bid and national best offer for each NMS 

security;

    (ii) Transaction reports reported pursuant to an effective 

transaction reporting plan filed with the Commission pursuant to, and 

meeting the requirements of, Sec.  242.601; and

    (iii) Last sale reports reported pursuant to the Options Price 

Reporting Authority Plan filed with the Commission pursuant to, and 

meeting the requirements of, Sec.  242.608.

    (6) The national market system plan submitted pursuant to this 

section shall require the central repository to retain the information 

collected pursuant to paragraphs (c)(7) and (e)(5) of this section in a 

convenient and usable standard electronic data format that is directly 

available and searchable electronically without any manual intervention 

for a period of not less than five years. The information shall be 

available immediately, or if immediate availability cannot reasonably 

and practically be achieved, any search query must begin operating on 

the data not later than one hour after the search query is made.

    (f) Surveillance. Every national securities exchange and national 

securities association subject to this section shall develop and 

implement a surveillance system, or enhance existing surveillance 

systems, reasonably designed to make use of the consolidated 

information contained in the consolidated audit trail.

    (g) Compliance by Members. (1) Each national securities exchange 

and national securities association shall file with the Commission 

pursuant to section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)) and Sec.  

240.19b-4 on or before [120 days from approval of this rule] a proposed 

rule change to require its members to comply with the requirements of 

this section and the national market system plan submitted pursuant to 

this section and approved by the Commission of which the national 

securities exchange or national securities association is a sponsor.

    (2) Each member of a national securities exchange or national 

securities association that is a sponsor of the national market system 

plan submitted pursuant to this section and approved by the Commission 

shall collect and submit to the central repository the information 

required by paragraph (c) of this section and shall comply with the 

synchronization requirements of paragraph (d) of this section.

    (3) The national market system plan submitted pursuant to this 

section shall include a provision that by subscribing to and submitting 

the plan to the Commission, each national securities exchange and 

national securities association that is a sponsor to the plan agrees to 

enforce compliance by its members with the provisions of the plan.

    (4) The national market system plan submitted pursuant to this 

section shall include a mechanism to ensure compliance with the 

requirements of the plan by the members of a national securities 

exchange or national securities association that is a sponsor of the 

national market system plan submitted pursuant to this section and 

approved by the Commission.

    (h) Compliance by National Securities Exchanges and National 

Securities Associations. (1) Each national securities exchange and 

national securities association shall comply with the provisions of the 

national market system plan submitted pursuant to this section and 

approved by the Commission of which it is a sponsor.

    (2) Any failure by a national securities exchange or national 

securities association to comply with the provisions of the national 

market system plan submitted pursuant to this section and approved by 

the Commission of which it is as sponsor shall be considered a 

violation of this section.

    (3) The national market system plan submitted pursuant to this 

section shall include a mechanism to ensure compliance by the sponsors 

of the plan with the requirements of the plan.



[[Page 32610]]



    (i) Other Securities and Other Types of Transactions. The national 

market system plan submitted pursuant to this section shall include a 

provision requiring each national securities exchange and national 

securities association to jointly provide to the Commission within two 

months after effectiveness of the national market system plan a 

document outlining how such exchanges and associations would propose to 

incorporate into the consolidated audit trail information with respect 

to equity securities that are not NMS securities, debt securities, 

primary market transactions in NMS stocks, primary market transactions 

in equity securities that are not NMS securities, and primary market 

transactions in debt securities, including details for each order and 

reportable event that would be required to be provided, which market 

participants would be required to provide the data, an implementation 

timeline, and a cost estimate.

    (j) Definitions.

    (1) The term customer shall mean:

    (i) The beneficial owner(s) of the account originating the order; 

and

    (ii) The person exercising investment discretion for the account 

originating the order, if different from the beneficial owner(s);

    (2) The term customer account information shall include, but not be 

limited to, account number, account type, customer type, date account 

opened, and large trader identifier (if applicable).

    (3) The term material terms of the order shall include, but not be 

limited to, the NMS security symbol, security type, price (if 

applicable), size (displayed and non-displayed), side (buy/sell), order 

type; if a sell order, whether the order is long, short, short exempt; 

if a short sale, the locate identifier, open/close indicator, time in 

force (if applicable), whether the order is solicited or unsolicited, 

whether the account has a prior position in the security; if the order 

is for a listed option, option type (put/call), option symbol or root 

symbol, underlying symbol, strike price, expiration date, and open/

close, and any special handling instructions.

    (4) The term order shall mean:

    (i) Any order received by a member of a national securities 

exchange or national securities association from any person;

    (ii) Any order originated by a member of a national securities 

exchange or national securities association; or

    (iii) Any bid or offer.

    (5) The term reportable event shall include, but not be limited to, 

the receipt, origination, modification, cancellation, routing, and 

execution (in whole or in part).



    Dated: May 26, 2010.



    By the Commission.

Elizabeth M. Murphy,

Secretary.

[FR Doc. 2010-13129 Filed 6-4-10; 8:45 am]

BILLING CODE 8010-01-P`