32556 Federal Register / Vol. 75, No. 109 / Tuesday, June 8, 2010 / Proposed Rules 

1 17 CFR 240.17a–25. 

2The 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). 

3For example, the Chicago Mercantile Exchange 

Inc. (‘‘CME’’) offers S&P 500 futures and ‘‘E-Mini’’ 

futures on the S&P 500 Index ($50 × S&P 500 Index 

price). 

4For 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). 

5For example, OneChicago, LLC lists futures on 

the SPY, and CBOE lists options on the iShares S&P 

500 Value Index Fund. 

6See infra Section I.G. (discussing past 

Commission requests for comment on regulation of 

intermarket trading). 

7See, 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). 

8See, 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). 

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. 

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. 

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 

rule-comments@sec.gov. 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

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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9As 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. 

10Bluesheets 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. 

11The 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). 

13See Securities Exchange Act Release No. 39729 

(March 6, 1998), 63 FR 12559 (March 13, 1998) 

(order approving proposed rules comprising OATS) 

(‘‘OATS Approval Order’’). 

14See 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’’). 

15See 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). 

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

17See infra Section I.G. 

18For 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. 

19See, 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. 

20See 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. 

22See 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). 

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 crossmarket 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. 

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

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 crossmarket 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. 

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. 

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

In the late 1980s, as the volume of 

trading and securities transactions 


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23See 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). 

24See 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. 

25 17 CFR 240.17a–25. 

26See Rule 17a–25 Adopting Release, supra note 

20, at 35836. 

27EBS data does not, however, include the time 

of execution, and often does not include the 

identity of the beneficial owner. See infra note 147. 

28A 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. 

29See Securities Exchange Act Release No. 42741 

(May 2, 2000), 65 FR 26534 (May 8, 2000) (‘‘Rule 

17a–25 Proposing Release’’). 

30See Rule 17a–25 Adopting Release, supra note 

20. 

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

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

8211. 

33See 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). 

34See 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. 

35This 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. 

36NSCC 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. 

37The 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’’). 

38A 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. 

39See 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. 

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. 

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 narrowlyfocused 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

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 brokerdealers 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

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 brokerdealer 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 brokerdealer.35

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. 

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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41 Id. 42See FINRA Rules 7400 to 7470. See also OATS 

Approval Order, supra note 13. 43FINRA 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). 44A 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). 45Each 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). 

46OATS 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). 

47See FINRA Rules 7440 and 7450. 

48FINRA 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). 

49The 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). 

50The 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). 

51For 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). 

52For 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). 

53See OATS Reporting Technical Specifications, 

January 5, 2010, available at http://www.finra.org/ 

web/groups/industry/@ip/@comp/@regis/ 

documents/appsupportdocs/p120686.pdf. 

54See 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. 

57See NYSE Rule 132B, and OTS Approval 

Order, supra note 14. 

58OTS is applicable to all orders in NYSE-listed 

securities, regardless of account type (firm or 

customer). See NYSE Rule 132B(a)(1). 

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 marketwide synchronization of clocks used in 

connection with the new audit trail 

system.41 In response to the order, the 

NASD created OATS.42

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: 

• 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

• 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; 

• 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 

• 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

FINRA uses this information to recreate 

daily market activity for FINRA’s market 

surveillance activities.53

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

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 


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59See 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). 

60See 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. 

61Members 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). 

62The 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). 

63The 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). 

64The 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). 

65For 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). 

66See 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. 

67The 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). 

68The required information also includes the 

system-generated time of recording order details. 

See NYSE Rule 123(e) and NYSE Amex Equities 

Rule 123(e). 

69See NYSE Rule 123(e) and NYSE Amex 

Equities Rule 123(e). 

70The specific information required includes 

security symbol; quantity; transaction price; and 

execution time. See NYSE Rule 123(f) and NYSE 

Amex Equities Rule 123(f). 

71The 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). 

72The required information includes whether the 

account for which the order was executed was that 

of a member or member organization or nonmember 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). 

73Amex 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. 

75The 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). 

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: 

• 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

• 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 

• 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

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

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

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 


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76See Options Settlement Order, supra note 15, 

at 12. 

77 Id. at 22. 

78 Id. at 22–25. 

79See Options Settlement Order, supra note 15, 

at 22–25. 

80See 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). 

81The 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. 

82The required information also includes 

identification of the terminal or individual 

completing the order ticket. 

83See 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. 

84For purposes of this release, the Commission 

does not consider SRO EBS rules to be audit trail 

rules. 

85See 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. 

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

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. 

88 Id. 

89 Id. 

90 Id. The participant also must record the systemgenerated 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. 

91See 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. 

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

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, timesequenced 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 nonelectronic 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

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

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

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

• 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); 

• 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

• 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

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

G. Prior Commission Request for 

Comment 

The Commission has previously 

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92See 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’’). 93See 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. 

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

Intermarket Trading Concept Release, supra note 

92, at 27224. 

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

Intermarket Trading Concept Release, supra note 

92, at 27224. 

96The 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). 

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

Intermarket Trading Concept Release, supra note 

92, at 27224. 

98See Nasdaq Petition, supra note 93, at 10–11, 

and Intermarket Trading Concept Release, supra 

note 92, at 27224. 

99See 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’’). 

100Of 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). 

101See Goldman Sachs and Spear, Leeds & 

Kellogg Comment Letter, supra note 99, at 3. 

102 Id at 4. 

103See Citigroup Comment Letter, supra note 99, 

at 6. 

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

One commenter agreed that the Commission would 

be justified in requiring all SROs trading Nasdaqlisted 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. 

105See 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. 

market regulation, including whether 

changes should be made to existing 

audit trail rules, in two concept releases 

in 2003 and 2004.92

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 crossmarket 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

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

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

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 


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

107See 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). 

108See 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. 

109See 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. 

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

112See ISG 2003 Comment Letter, supra note 99. 

113See Concept Release Concerning SelfRegulation, supra note 92, at Sections IV.C and 

V.A.2. 

114 Id. 

115 Id. at 71277. 

116See 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. 

119See comment letter from Mary Yeager, 

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

Commission, dated March 8, 2005, at 8. 

120 Id. 

121See 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. 

122See comment letter from Kim Bang, Chief 

Executive Officer, Bloomberg L.P., to Jonathan G. 

Katz, Secretary, Commission, dated March 8, 2005, 

at 4. 

123See 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. 

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

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

In 2004, in a release seeking comment 

on a variety of issues relating to selfregulation, 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

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 brokerdealer, 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

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

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

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 


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124See, 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). 

125The 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. 

126See, 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). 

127See, e.g., Section 19(h)(1) of the Exchange Act, 

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

128See Section 11A(a)(3)(B) of the Exchange Act, 

15 U.S.C. 78k–1(a)(3)(B). 

129See infra Section III for a description of 

proposed Rule 613. 

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

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

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

78i. 

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

78j. 

133See infra Section VI.A (discussion of benefits 

of the proposed Rule). 

134 Id. 

135See infra note 149. 

136 17 CFR 240.17a–25. 

137See supra Sections I.A. and I.B. for a 

description of the EBS system, Rule 17a–25, and 

equity cleared reports. 

138See 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 

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. 

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. 

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. 

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

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. 

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. 

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 


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CHX Article II, Rule 3; Nasdaq Rules 6950 to 6958; 

and BX Rules 6950 to 6958. 139 15 U.S.C. 78q(a). 140See, 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. 142Rule 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). 

143See 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. 

144See 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). 

145See NYSE Rule 132B(c)(3). 

146See FINRA Rule 7440(c)(6). The Commission 

understands that FINRA is able to link OATS order 

information to Nasdaq order and execution data. 

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. 

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

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. 

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. 

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 


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148For purposes of this discussion, introducing 

broker means the broker-dealer that received or 

originated the order, and that is not also the 

clearing broker. 

149Rule 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. 

150As 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. 

151See 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. 

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 brokerdealer’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. 

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. 

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 dayend 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 brokerdealers and then examine, analyze and 

reconcile the disparate information 

provided to accurately ‘‘reconstruct’’ the 

market.150

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 


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152See 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). 

153See supra Sections I.C. and I.D. 

154The 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. 

155See supra note 96. 

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 brokerdealers 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). 

157See 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. 

face significant costs to comply with 

varying audit trail rules.152

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. 

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

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 informationsharing cooperative governed only by 

contract. 

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 requestbased 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

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 brokerdealers 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

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 brokerdealers 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 


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158The proposed Rule also would require the 

reporting of certain post-trade information. See 

infra Section III.D.2. 

159National 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). 

160National 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 brokerdealers 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. 

161See 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). 

163See proposed Rule 613(a)(5) and 17 CFR 

242.608. 

164NMS 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). 

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

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. 

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

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 


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165Equity 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. 

166Asset-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). 

167A 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). 

168See 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. 

169See FINRA Rule 6730(a)(5). 

170 15 U.S.C. 78i(a) and 78j(b). 

171The 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. 

172Asset verification is an exam process that 

attempts to locate independent information to 

verify certain customer positions, transactions, and 

balances at broker-dealers. 

173Sponsor, 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). 

secondary market transactions in other 

securities, including equity securities 165

that are not NMS securities, corporate 

bonds, municipal bonds, and assetbacked 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. 

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. 

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 


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174See 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). 

175Quotation is defined in Rule 600(a)(62) of 

Regulation NMS to mean a bid or an offer. 17 CFR 

242.600(a)(62). 

176See Rule 601 of Regulation NMS, 17 CFR 

242.601. 

177See, e.g., FINRA Rule 5320 and NYSE Arca 

Equities Rule 6.16. 

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. 

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

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

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 


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178A 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. 

179Reportable 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. 

180See 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. 

181An ATS is defined in Rule 300(a) of 

Regulation ATS. See 17 CFR 242.300(a). Regulation 

ATS requires ATSs to be registered as brokerdealers 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. 

182See 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. 

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-ofthe-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

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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32572 Federal Register / Vol. 75, No. 109 / Tuesday, June 8, 2010 / Proposed Rules 

183See proposed Rule 613(c)(5). 

184See proposed Rule 613(c)(6). 

185See infra Section III.F. for a discussion of the 

central repository. 

186See proposed Rule 613(c)(3). See supra note 

179 for a definition of reportable event. 

187See 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. 

188See proposed Rule 613(c)(2). 

189See supra notes 28, 154, and 171 and 

accompanying text. 

190See supra note 179 for a definition of 

reportable event. 

191The proposed Rule would define ‘‘customer’’ 

to mean the beneficial owner(s) of the account 

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

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

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

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-ofday 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. 

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 


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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). 

192See supra Section II.A. 

193See proposed Rule 613(c)(7)(i)(A). 

194See proposed Rule 613(c)(7)(i)(C). See also 

Large Trader Proposal, supra note 11. 

195See, e.g., Rules 17a–3, 17a–4, and 17a–25 

under the Exchange Act, 17 CFR 240.17a–3, 17a– 

4, and 17a–25. 

196See proposed Rule 613(c)(7)(i)(B). 

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

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. 

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. 

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 nonU.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 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
32574 Federal Register / Vol. 75, No. 109 / Tuesday, June 8, 2010 / Proposed Rules 

197 17 CFR 242.604. 

198See 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). 199See proposed Rule 613(c)(7)(i)(I). 200A 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). 

201See proposed Rule 613(j)(3). 

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. 

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

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 


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202See, e.g., CBOE Rule 6.51; BATS Rule 20.7; 

and ISE Rule 1404. 203 Id. 204See proposed Rule 613(c)(7)(i)(D). 

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. 

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. 

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. 

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 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
32576 Federal Register / Vol. 75, No. 109 / Tuesday, June 8, 2010 / Proposed Rules 

205For 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. 

206See proposed Rule 613(c)(7)(vi)(C). 

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. 

208See proposed Rule 613(c)(7)(ii). 

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). 

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 reused, 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 brokerdealer 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 brokerdealer routes the order internally; 207

and (7) the material terms of the 

order.208

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; 

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209See proposed Rule 613(c)(7)(iii). 

210See proposed Rule 613(c)(7)(iv). 

211Each 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.). 

212See proposed Rule 613(c)(7)(v). 

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. 

214See supra notes 205–206 and accompanying 

text. 

dealer or national securities exchange 

routing the order; and (6) the material 

terms of the order.209

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 brokerdealers responsible for the changes. 

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

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. 

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 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
32578 Federal Register / Vol. 75, No. 109 / Tuesday, June 8, 2010 / Proposed Rules 

215See supra note 206 and accompanying text. 

216For 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. 

217See proposed Rule 613(c)(4). 

218See proposed Rule 613(c)(7)(vi)(A). 

219See proposed Rule 613(c)(7)(vi)(B) and (C). 

220See proposed Rule 613(c)(7)(vi)(D), (E), and 

(F). 

221A 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). 

222The term ‘‘all-in’’ price is intended to capture 

the total costs for executing a trade. 

223See FINRA Rule 2010 and IM–2440–1. 

224See 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. 

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? 

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. 

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. 

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 contraside 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

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 (markdowns), 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

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 


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Federal Register / Vol. 75, No. 109 / Tuesday, June 8, 2010 / Proposed Rules 32579 

225 In a typical give-up arrangement, a brokerdealer that is not a member of an exchange (Brokerdealer A) may route the order to another brokerdealer that is a member of an exchange (Brokerdealer B) for execution on that exchange. If Brokerdealer 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 Brokerdealer A. 

226See proposed Rule 613(d)(1). 

227See proposed Rule 613(a)(3)(ii). 

228See proposed Rule 613(d)(2). 

229See proposed Rule 613(e)(1). 

230See supra note 173 for a definition of a plan 

sponsor in Rule 600(a)(70) of Regulation NMS, 17 

CFR 242.600(a)(70). 

231See infra Section III.I. for a definition and 

discussion of the plan processor. 

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. 

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

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. 

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

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. 


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232See proposed Rule 613(e)(1). 233See 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). 

234See Rule 611 of Regulation NMS, 17 CFR 

242.611. See also ISE Rule 1901, NYSE Arca 6.94, 

and Phlx Rule 1084. 235See supra Section III.D.1.v. 

236See 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). 

237See proposed Rule 613(e)(6). 

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. 

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. 

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. 

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? 

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

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 


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238See proposed Rule 613(e)(2). 

239 Id. 

240See proposed Rule 613(e)(3). 

241As 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). 

242See 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). 243 15 U.S.C. 6801–6809. 

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. 

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. 

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. 

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-LeachBliley 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? 

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 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
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244See 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. 245See proposed Rule 613(e)(4)(iii). 

246See proposed Rule 613(h)(3) and Rule 

613(g)(4). 

247See 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? 

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. 

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. 

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. 

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 


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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). 

249See proposed Rule 613(h)(1) 

250See proposed Rule 613(h)(2). 

251See proposed Rule 613(e)(6) and supra note 

237 and accompanying text. 

252 17 CFR 242.608(c). 

253See proposed Rule 613(h)(3). 

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. 

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. 

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. 

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. 

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 


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254 15 U.S.C. 78s(b)(2). 

255 17 CFR 240.19b–4. 

256See proposed Rule 613(g)(1). This provision in 

the proposed Rule echoes the requirement 

contained in Rule 608 that provides ‘‘each selfregulatory 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). 

257The 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). 

258See proposed Rule 613(g)(2). 

259See proposed Rule 613(g)(3). 

260See proposed Rule 613(g)(4). 

261See 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. 

262See, 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). 

263See proposed Rule 613(b)(1). 

264See proposed Rule 613(b)(3). 

265For 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. 

266See, 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). 

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. 

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

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

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? 

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, onevote system, the SROs could choose 

another alternative to ensure fair 

representation. 

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. 

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 


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267See 17 CFR 242.600(55). 

268See proposed Rule 613(a)(3)(i). 269See proposed Rule 613(b)(5). 

270See proposed Rule 613(b)(2). 

271See e.g. Section 7.1 of OPRA Plan. 

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 decisionmaking 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. 

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. 

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. 

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. 


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32586 Federal Register / Vol. 75, No. 109 / Tuesday, June 8, 2010 / Proposed Rules 

272For 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. 

273See proposed Rule 613(a)(3)(v). 

274See 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. 

276 44 U.S.C. 3501 et. seq. 

277See proposed Rule 613(a)(1) and supra Section 

III. 

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. 

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. 

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. 

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.’’ 

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 


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278See proposed Rule 613(c) and supra Section 

III.D. 

279For 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). 

280For 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). 

281The 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). 

282See proposed Rule 613(a)(5). 

283See proposed Rule 613(i). 

284 15 U.S.C. 78s(b)(2) and 17 CFR 240.19b–4. 

285See proposed Rule 613(g)(1). 

286See 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. 

287See proposed Rule 613(e)(5); 17 CFR 242.601. 

288See proposed Rule 613(e)(6). 

289See proposed Rule 613(c)(1) and supra Section 

III.D. 

290For example, Rule 17a–3 requires brokerdealers 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. 

291The 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. 

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

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. 

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. 

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

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

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 


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292See supra Section I.A. (discussing Rule 17a– 

25 and the EBS system). 

293See supra Section I.C. (discussing the 

requirements of FINRA’s OATS). 

294See 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. 295See proposed Rule 613(e)(6). 

296The 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. 

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. 

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. 

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. 

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 securitybased 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 


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297See 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. 

298This is the number of broker-dealers filing 

FOCUS Reports at year-end 2008. FOCUS Reports 

are required to be filed by all registered brokerdealers, 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. 

299The 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. 

300Based on industry sources, the Commission 

estimates that the hourly rate for outsourced legal 

services in the securities industry is $400 per hour. 

301The 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. 

302The 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. 

303The Commission derived the total estimated 

burden for outsourced legal counsel based on the 

Continued 

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

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

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

The Commission preliminarily 

expects that national securities 

exchange and national securities 

association respondents may incur onetime 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. 

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. 

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 onetime capital cost of approximately 

$10,000.303 Therefore, the Commission 


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assumption that the report required by the proposed 

Rule would require approximately half the effort of 

drafting and filing the proposed NMS plan. 

304 15 U.S.C. 78q(a); 17 CFR 240.17a–1. 

305The 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. 

306These 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. 

307The 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. 

308This 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. 

309The 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 

preliminarily estimates that the onetime 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. 

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. 

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. 

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. 

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


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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. 310This 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). 

311The 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. 

312The 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. 

313See proposed Rule 613(e)(5). 

314See proposed Rule 613(e)(6). 

315See supra Section V.D.1.d. 

316The Commission derived this estimate based 

on the average current cost of obtaining 

consolidated quotation and transaction information 

from existing quotation and transaction reporting 

plans. 

317See 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). 

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. 

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. 

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

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

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

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

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 


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319See 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. 

320This 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. 

321The 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. 

322These 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. 

323See Regulation NMS Reproposing Release, 

supra note 306, at 77480. 

324The 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. 

325This 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. 

326See infra Section IX. 

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. 

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. 

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 frontend 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. 

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. 

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 brokerdealers 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. 


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327This number includes introducing brokerdealers 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. 

328This 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. 

329The 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. 

330The Commission bases this estimate one a fulltime Compliance Manager spending approximately 

2 days per quarter of his time on overseeing ongoing 

compliance with the proposed Rule. 

331Proposed 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 brokerdealer(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. 

332See proposed Rule 613(e)(2). 

333See proposed Rule 613(e)(4)(i). 

334 17 CFR 240.17a–1. 

335 17 CFR 240.17a–4. 

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. 

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. 

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? 

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

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

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. 


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336See supra Sections I.C., I.D., II.A., and V.A.5. 

337See supra Section III.D.1. 

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

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 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 109 / Tuesday, June 8, 2010 / Proposed Rules 32595 

338The 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. 

339See Guiso, Sapienza, and Zingales, ‘‘Trusting 

the Stock Market,’’ available at http://ssrn.acom/ 

abstract=811545. 

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

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 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
32596 Federal Register / Vol. 75, No. 109 / Tuesday, June 8, 2010 / Proposed Rules 

340See proposed Rule 613(c)(1), (c)(3), (c)(7); see 

also supra Sections III.A., III.B., III.D., and V.A.5. 

341As 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). 

342This figure includes internal personnel time 

and external legal costs. Commission staff estimates 

that each exchange and association would expend 

(400 Attorney hours × $305 per hour) + (100 

Compliance Manager hours × $258 per hour) + (220 

Programmer Analyst hours × $193 per hour) + (120 

Business Analyst hours × $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). 

343Commission staff estimates that annually each 

exchange and association would expend (64 

Attorney hours × $305 per hour) + (64 Compliance 

Manager hours × $258 per hour) + (64 Programmer 

Analyst hours × $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. 

344See proposed Rule 613(d)(1). 

would benefit the NMS for NMS 

securities by encouraging more efficient 

and potentially a higher level of capital 

investment. 

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. 

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 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
Federal Register / Vol. 75, No. 109 / Tuesday, June 8, 2010 / Proposed Rules 32597 

345See proposed Rule 613(d)(2). 

346See 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. 

347Commission 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. 

348Commission 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. 

349This estimate assumes that each SRO or 

member would expend (16 Programmer Analyst 

hours × $193 per hour) + (16 Business Analyst 

hours × $194 per hour) = $6,192 to carry out this 

annual evaluation. 

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. 

351See supra notes 317 to 319 and accompanying 

text. 

352The 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. 

353Commission staff estimates that each exchange 

and association would expend (100 Attorney hours 

× $305 per hour) + (80 Compliance Manager hours 

× $258 per hour) + 1,960 Programmer Analyst hours 

× $193 per hour) + 60 Business Analyst hours × 

$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. 

354Commission staff estimates that the cost for 

system hardware, software, and other materials 

would be $4,542,940. See supra note 306 and 

accompanying text. 

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

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

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

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. 

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. 

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 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
32598 Federal Register / Vol. 75, No. 109 / Tuesday, June 8, 2010 / Proposed Rules 

355Commission staff estimates that each exchange 

and association would expend (1,500 Attorney 

hours × $305 per hour) + (1,600 Compliance 

Manager hours × $258 per hour) + (1,375 

Programmer Analyst hours × $193 per hour) + (500 

Business Analyst hours × $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. 

356See supra note 328. The Commission based 

this estimated cost on the Commission’s previous 

experience with, and burden estimates for, brokerdealer 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. 

357Commission staff estimates that annually each 

of these types of members would expend (50 

Attorney hours × $305 per hour) + (50 Compliance 

Manager hours × $258 per hour) + (40 Information 

Analyst hours × $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. 

358This 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 × $258 per hour). See supra note 330. 

359See supra Section V.D.2 and note 320. 

360Commission staff estimates that each member 

would expend (1,240 Attorney hours × $305 per 

hour) + (1,540 Compliance Manager hours × $258 

per hour) + (2,750 Programmer Analyst hours × 

$193 per hour) + (1,000 Business Analyst hours × 

$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. 

might SROs incur? Please be specific in 

your response. 

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. 

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 brokerdealer, 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. 

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

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 thirdparty 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 thirdparty 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 


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361Commission staff estimates that each member 

would expend (800 Attorney hours × $305 per hour) 

+ (1,000 Compliance Manager hours × $258 per 

hour) + (500 Programmer Analyst hours × $193 per 

hour) + (750 Business Analyst hours × $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. 

362See supra Section V.D.2. 

363See proposed Rule 613(f). 

364This estimate is based on discussions with 

market participants. This estimate does not 

separately break out personnel time versus system 

costs. 

365Commission staff estimates that each member 

would expend (3,600 Senior Compliance Examiner 

hours × $212 per hour) and (1,800 Information 

Analyst hours × $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. 

member to implement changes to its 

own systems to comply with the 

requirements of the proposed 

consolidated audit trail. 

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

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. 

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 


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366See proposed Rule 613(e)(6). 

367The 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. 

368Commission staff estimates that each exchange 

and association would expend (3,000 Attorney 

hours × $305 per hour) + (4,000 Compliance 

Manager hours × $258 per hour) + (7,500 

Programmer Analyst hours × $193 per hour) + 

(3,000 Business Analyst hours × $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). 

369See 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. 

370Commission staff estimates that annually each 

exchange and association would expend (64 

Attorney hours × $305 per hour) + (64 Compliance 

Manager hours × $258 per hour) + (64 Programmer 

Analyst hours × $193 per hour) = $48,384 to ensure 

and review the operation and administration of the 

central repository. See supra note 343 and 

accompanying text. 

371See supra Section V.D.1.e. 

372See proposed Rule 613(g)(1). 

373The 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. 

374This figure was calculated as follows: (129 

Attorney hours × $305) = $39,345 × 15 SROs = 

$590,175. Commission staff estimates that each 

exchange and association would expend 

approximately 129 hours of legal time × $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). 

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

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

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

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

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 


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375Commission staff estimates that each member 

would expend (200 Attorney hours × $305 per hour) 

+ (50 Compliance Manager hours × $258 per hour) 

+ (110 Programmer Analyst hours × $193 per hour) 

+ (60 Business Analyst hours × $194 per hour) + 

(25 Outsourced Legal Counsel hours × $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. 

376This aggregate cost estimate includes the 

aggregate one-time cost of preparing and filing the 

NMS plan ($3,503,100); the aggregate average onetime cost for each exchange and FINRA to 

synchronize clocks consistent with the proposed 

requirements ($144,750); the aggregate average onetime 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). 

377This 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). 

378See supra note 368. 

379See supra notes 369 to 371 and accompanying 

text. 

380We preliminarily estimate there are 1,114 of 

these broker-dealers, including all clearing firms 

and alternative trading systems. See supra note 320. 

381This 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). 

382This 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 

Continued 

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 onetime 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

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 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2
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annually evaluate the synchronization time 

standards and perform any necessary 

synchronization adjustments ($19,798,008). 

383We preliminarily estimate there are 3,006 of 

these broker-dealers, mainly including non-clearing 

broker-dealers. See supra note 327. 

384This 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). 

385This 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). 

386 15 U.S.C. 78c(f). 

387 15 U.S.C. 78w(a)(2). 

388See Section 11A(a)(3)(B) of the Exchange Act, 

15 U.S.C. 78k–1(a)(3)(B). 

389See supra Section III.D. for a detailed 

description of the required data. 

390See 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). 

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 onetime 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. 

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 nonexchange 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. 

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

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 


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391See 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). 

392See 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). 

393See 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). 

394See Securities Exchange Act Release No. 

54528 (September 28, 2006), 71 FR 58650 (October 

4, 2006) (order approving rules to govern trading 

equities). 

395See 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). 

396See 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.). 

397See Securities Exchange Act Release No. 

26870 (May 26, 1989), 54 FR 23963 (June 5, 1989) 

(S7–25–87). 

398See Securities Exchange Act Release No. 

43591 (November 17, 2000), 65 FR 75439 

(December 1, 2000). 

399See 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). 

400See, 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). 

401On 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). 

402This 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. 

403These 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. 

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

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

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

There are approximately 5,178 

registered broker-dealers, of which 

approximately 890 are small brokerdealers.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 brokerdealers 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. 

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 brokerdealer 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 


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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 


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404Pub. 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). 

405 5 U.S.C. 601 et seq. 

406 5 U.S.C. 603(a). 

407 5 U.S.C. 551 et seq. 

408The 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). 

409See proposed Rule 613(c) and supra Sections 

III.B. and III.D. 

410See supra Section II.A. 

411 17 CFR 240.17a–25. 

412See supra Sections I.A and I.B. for a 

description of the EBS system, Rule 17a–25, and 

equity cleared reports. 

413See, 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). 

414See, 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). 

415See, e.g., 19(h)(1) of the Exchange Act, 15 

U.S.C. 78(h)(1). 

416See 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. 

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. 

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

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

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

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. 

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

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 


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417See 17 CFR 240.0–10(c). 

418See 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. 

419See 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. 

420Such 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. 

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

The Commission estimates that as of 

December 31, 2008, there were 

approximately 890 Commissionregistered 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 brokerdealers. 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 brokerdealers 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

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. 

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, 


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421See 17a–25 Adopting Release, supra note 20, 

at 35839–35840. 

422See supra notes 326–330 and accompanying 

text and notes 356–358 and accompanying text. 

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 brokerdealers sufficient time to modify 

existing systems, or procure third party 

functionality, to comply with the 

proposed Rule.422

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 brokerdealers 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 § 242.613 to read as follows: 

§ 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 

§ 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 § 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 


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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 brokerdealer, 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 brokerdealer 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 brokerdealer identifier for each customer and 

broker-dealer. 

(d) Clock Synchronization. The 

national market system plan submitted 

pursuant to this section shall require 


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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, § 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, § 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 § 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. 


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32610 Federal Register / Vol. 75, No. 109 / Tuesday, June 8, 2010 / Proposed Rules 

(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 


emcdonald on DSK2BSOYB1PROD with PROPOSALS2