Document ID: SEC-2010-0826-0001
Agency: sec
Document Type: Proposed Rule
Title: Consolidated Audit Trail
Posted Date: 2010-06-08T04:00Z

[Federal Register: June 8, 2010 (Volume 75, Number 109)]
[Proposed Rules]               
[Page 32555-32610]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08jn10-38]                         

[[Page 32555]]

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Part II

Securities and Exchange Commission

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17 CFR Part 242

Consolidated Audit Trail; Proposed Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

[Release No. 34-62174; File No. S7-11-10]
RIN 3235-AK51

 
Consolidated Audit Trail

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing new Rule 613 under Section 11A(a)(3)(B) of the Securities 
Exchange Act of 1934 (``Exchange Act'') that would require national 
securities exchanges and national securities associations (``self-
regulatory organizations'' or ``SROs'') to act jointly in developing a 
national market system (``NMS'') plan to develop, implement, and 
maintain a consolidated order tracking system, or consolidated audit 
trail, with respect to the trading of NMS securities.
    The Commission preliminarily believes that with today's electronic, 
interconnected markets, there is a heightened need for regulators to 
have efficient access to a more robust and effective cross-market order 
and execution tracking system. Currently, many of the national 
securities exchanges and the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') have audit trail rules and systems to track 
information relating to orders received and executed, or otherwise 
handled, in their respective markets. While the information gathered 
from these audit trail systems aids the SRO and Commission staff in 
their regulatory responsibility to surveil for compliance with SRO 
rules and the federal securities laws and regulations, the Commission 
preliminarily believes that existing audit trails are limited in their 
scope and effectiveness in varying ways. In addition, while the SRO and 
Commission staff also currently receive information about orders or 
trades through the electronic bluesheet (``EBS'') system, Rule 17a-25 
under the Exchange Act,\1\ or from equity cleared reports, the 
information is limited, to varying degrees, in detail and scope.
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    \1\ 17 CFR 240.17a-25.
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    A consolidated audit trail would significantly aid in SRO efforts 
to detect and deter fraudulent and manipulative acts and practices in 
the marketplace, and generally to regulate their markets and members. 
In addition, such an audit trail would benefit the Commission in its 
market analysis efforts, such as investigating and preparing market 
reconstructions and understanding causes of unusual market activity. 
Further, timely pursuit of potential violations can be important in 
seeking to freeze and recover any profits received from illegal 
activity.

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

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

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to 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\
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    \2\ The Chicago Board Options Exchange, Incorporated (``CBOE'') 
lists options on the S&P 500 Index (SPX) and on the Mini-S&P 500 
Index (XSP) (1/10th the value of the S&P 500 Index).
    \3\ For example, the Chicago Mercantile Exchange Inc. (``CME'') 
offers S&P 500 futures and ``E-Mini'' futures on the S&P 500 Index 
($50 x S&P 500 Index price).
    \4\ For example, NYSE Arca, Inc. (``NYSE Arca'') lists an ETF 
based on the S&P 500 SPDR (SPY) and the iShares S&P 500 Index Fund 
(IVV).
    \5\ For example, OneChicago, LLC lists futures on the SPY, and 
CBOE lists options on the iShares S&P 500 Value Index Fund.
    \6\ See infra Section I.G. (discussing past Commission requests 
for comment on regulation of intermarket trading).
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    The individual SROs are responsible for regulating their markets 
and their members.\7\ Further, the Commission has responsibilities to 
oversee the SROs, the securities markets, and registered broker-
dealers, and routinely conducts examinations of or investigations into 
trading activity as part of its oversight and enforcement programs.\8\ 
The SROs and the Commission need tools to

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effectively carry out these responsibilities even when trading occurs 
on multiple markets. For example, it is important that the SRO and 
Commission staff have order and trade data sufficient to monitor cross-
market trading activity, assist with investigations of potential 
violations of federal securities laws and exchange rules, and perform 
market reconstructions or other analysis necessary to understand 
trading activity.\9\ Such information also is important to the 
Commission in carrying out its oversight responsibilities.
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    \7\ See, e.g., Sections 6(b)(1), 15A(b)(2), and 19(g) of the 
Exchange Act, 15 U.S.C. 78f(b)(1), 15 U.S.C. 78o-3(b)(2), and 15 
U.S.C. 78s(g).
    \8\ See, e.g., Sections 2, 6(b)(1), 10, 15(b)(4)(D) and (E), and 
19(h) of the Exchange Act, 15 U.S.C. 78b, 15 U.S.C. 78f(b)(1), 15 
U.S.C. 78j, 15 U.S.C. 78o(b)(4)(D) and (E), and 15 U.S.C. 78s(h).
    \9\ As discussed below in Sections II and III, the Commission 
preliminarily believes that the proposal would improve the ability 
of regulators to conduct timely and accurate trading analyses for 
market reconstructions and complex investigations, as well as 
inspections and examinations. Indeed, the Commission believes that 
the proposed consolidated audit trail, if implemented, would have 
significantly enhanced the Commission's ability to quickly 
reconstruct and analyze the severe market disruption that occurred 
on May 6, 2010. If approved and implemented, the proposal also would 
enhance the Commission's ability to similarly respond to future 
severe market events.
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    The SROs' staff currently uses both EBS \10\ and SRO audit trail 
data to help fulfill their regulatory obligations.\11\ Commission staff 
also uses this data to perform its regulatory oversight obligations. 
The Commission and SROs have depended on the bluesheet system for 
decades to request trading records from broker-dealers needed for 
regulatory inquiries. Most SROs also maintain their own specific audit 
trail requirements applicable to their members. As discussed more fully 
below, for example, the National Association of Securities Dealers 
(``NASD'') \12\ established the Order Audit Trail System (``OATS'') 
\13\ in 1996, and the New York Stock Exchange (``NYSE'') implemented 
its Order Tracking System (``OTS'') \14\ in 1999. Beginning in 2000, 
several of the current options exchanges implemented the Consolidated 
Options Audit Trail System (``COATS'').\15\
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    \10\ Bluesheets are trading records requested by the Commission 
and SROs from broker-dealers that are used in regulatory 
investigations to identify buyers and sellers of specific 
securities.
    \11\ The Commission recently published for comment a proposal to 
establish a large trader reporting system. See Securities Exchange 
Act Release No. 61908 (April 14, 2010), 75 FR 21456 (April 23, 2010) 
(``Large Trader Proposal''). Under that proposal, large traders 
would be issued unique identifiers that they would be required to 
provide to the broker-dealers that execute transactions on their 
behalf, and the broker-dealers would be required to maintain, and 
provide to the Commission upon request, transaction records for each 
large trader customer. The large trader proposal is designed to 
address in the near term the Commission's current need for access to 
more information about large traders and their activities. As 
discussed below, the Commission anticipates that the proposed 
consolidated audit trail discussed in this release, which is much 
broader in scope, would take a significant amount of time to fully 
implement. This proposal would require that, if the Large Trader 
proposal is adopted, the large trader identification number be 
reported to the central repository as part of the identifying 
customer information. See proposed Rule 613(j)(2).
    \12\ In 2007, the NASD and the member-related functions of NYSE 
Regulation, Inc., the regulatory subsidiary of the New York Stock 
Exchange LLC (``NYSE''), were consolidated. As part of this 
regulatory consolidation, the NASD changed its name to FINRA. See 
Securities Exchange Act Release No. 56146 (July 26, 2007), 72 FR 
42190 (August 1, 2007). FINRA and the National Futures Association 
(``NFA'') are currently the only national securities associations 
registered with the Commission; however, the NFA has a limited 
purpose registration with the Commission under Section 15A(k) of the 
Exchange Act, 15 U.S.C. 78o-3(k). See also Securities Exchange Act 
Release No. 44823 (September 20, 2001), 66 FR 49439 (September 27, 
2001).
    \13\ See Securities Exchange Act Release No. 39729 (March 6, 
1998), 63 FR 12559 (March 13, 1998) (order approving proposed rules 
comprising OATS) (``OATS Approval Order'').
    \14\ See Securities Exchange Act Release No. 47689 (April 17, 
2003), 68 FR 20200 (April 24, 2003) (order approving proposed rule 
change by NYSE relating to order tracking) (``OTS Approval Order'').
    \15\ See In the Matter of Certain Activities of Options 
Exchanges, Administrative Proceeding File No. 3-10282, Securities 
Exchange Act Release No. 43268 (September 11, 2000) (Order 
Instituting Public Administrative Proceedings Pursuant to Section 
19(h)(1) of the Securities Exchange Act of 1934, Making Findings and 
Imposing Remedial Sanctions) (``Options Settlement Order''). See 
also, e.g., Securities Exchange Act Release No. 50996 (January 7, 
2005), 70 FR 2436 (order approving proposed rule change by CBOE 
relating to Phase V of COATS).
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    Currently, there is significant disparity in the audit trail 
requirements among the exchanges and FINRA, especially with respect to 
the information captured by each.\16\ Further, the information for each 
must be provided in different formats. The differences result in 
inconsistent requirements imposed on exchange and FINRA members, and 
also make it difficult to view trading activity across multiple 
markets. The lack of uniformity in, and cross-market compatibility of, 
SRO audit trails can make detection of illegal trading activity carried 
out across multiple markets and multiple products more difficult. The 
Commission has voiced concern about the lack of uniformity in, and 
cross-market compatibility of, the audit trails in the past.\17\ The 
Commission preliminarily believes that these differences may hinder the 
ability of the SROs and the Commission to effectively view and regulate 
trading activity across markets.
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    \16\ See infra Sections I.C, I.D, I.E, and I.F.
    \17\ See infra Section I.G.
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    Further, risks imposed on the markets by violative conduct can be 
substantially increased by automated trading, as market participants 
have the ability to trade numerous products and enormous volume in mere 
seconds. As trading venues have become more automated, and trading 
systems have become computerized, trading volumes have increased 
significantly,\18\ and trading has become more dispersed across more 
trading centers and therefore more difficult to monitor and trace.\19\ 
The Commission is concerned that current audit trail requirements are 
insufficient to capture in a timely manner all of the information 
necessary to efficiently and effectively monitor trading activity in 
today's highly automated and dispersed markets. The Commission also is 
concerned that the current lack of cohesive, readily available order 
and execution information impacts the ability of the SROs and the 
Commission staff to effectively perform their respective regulatory and 
oversight responsibilities with respect to trading activity by market 
participants across markets and products.
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    \18\ For example, consolidated average daily share volume and 
trades in NYSE-listed stocks increased from just 2.1 billion shares 
and 2.9 million trades in January 2005, to 5.9 billion shares (an 
increase of 181%) and 22.1 million trades (an increase of 662%) in 
September 2009. See Large Trader Proposal, supra note 11, at 21456.
    \19\ See, e.g., Securities Exchange Act Release No. 61358 
(January 14, 2010), 75 FR 3594 (January 21, 2010) (``Concept Release 
on Equity Market Structure'') at 3594-3596.
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A. Electronic Bluesheets and Rule 17a-25

    The Commission and the SROs frequently request bluesheets from 
broker-dealers to aid in investigations of possible Federal securities 
law violations and to create market reconstructions.\20\ Until the late 
1980s, bluesheets consisted of questionnaire forms that Commission and 
SRO regulatory staff mailed to firms to be manually completed and 
returned.\21\ Obtaining bluesheets in this manner was particularly 
onerous as there were substantial delays in the production and receipt 
of the requested information. Additionally, the data was submitted in a 
variety of formats, making analysis time-consuming, and requests could 
result in vast amounts of information requiring lengthy manual 
examination.\22\
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    \20\ See Securities Exchange Act Release No. 44494 (June 29, 
2001), 66 FR 35836 (July 9, 2001) (File No. S7-12-00) (``Rule 17a-25 
Adopting Release''), at 35836.
    \21\ Id.
    \22\ See Securities Exchange Act Release No. 25859 (June 27, 
1988), 53 FR 25029 (July 1, 1988) (approving both the NYSE and the 
American Stock Exchange's (``Amex'') rules for the electronic 
submission of transaction information).
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    In the late 1980s, as the volume of trading and securities 
transactions

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dramatically increased, the manual bluesheet system was replaced by the 
EBS system.\23\ The EBS system allows broker-dealers to electronically 
submit the requested information in a specific format and transmit it 
to the Securities Industry Automation Corporation (``SIAC'').\24\ SIAC 
then routes the information to the Commission or to an SRO as 
applicable.
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    \23\ See Rule 17a-25 Adopting Release, supra note 20, at 3-4. 
See also, e.g., id. and Securities Exchange Act Release Nos. 26235 
(November 1, 1988), 53 FR 44688 (November 4, 1988) (approving the 
CBOE rule for the electronic submission of transaction information); 
26539 (February 13, 1989), 54 FR 7318 (February 17, 1989) (approving 
the NASD's rule for the electronic submission of transaction 
information); and 27170 (August 23, 1989), 54 FR 37066 (September 6, 
1989) (approving the Philadelphia Stock Exchange's rule for the 
electronic submission of transaction information).
    \24\ See Rule 17a-25 Adopting Release, supra note 20, at 35836. 
SIAC is a subsidiary of NYSE Euronext and serves as the securities 
information processor of the Consolidated Tape Plan (``CTA Plan''), 
which governs the dissemination of trade information; the 
Consolidated Quotation Plan (``CQ Plan''), which governs the 
dissemination of quotation information; and the Options Price 
Reporting Authority Plan (``OPRA Plan''), which governs the 
dissemination of trade and quotation information for listed options. 
In this capacity, it provides real time quotation and transaction 
information to market participants.
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    The EBS system, supplemented by the requirements of Rule 17a-25 
under the Exchange Act,\25\ currently is used by Commission and SRO 
regulatory staff primarily to assist the staff in the investigation of 
possible federal securities law violations primarily involving insider 
trading and other market manipulations, and to conduct market 
reconstructions, especially following periods of significant market 
volatility.\26\ In its electronic format, the EBS system provides 
detailed execution information upon request by the Commission and the 
SROs' staff for specific securities during specified time frames.\27\ 
However, because the EBS system is designed for use in narrowly-focused 
enforcement investigations that generally involve trading in particular 
securities, it is less useful for large-scale market reconstructions 
and analyses involving numerous stocks during peak trading volume 
periods.\28\
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    \25\ 17 CFR 240.17a-25.
    \26\ See Rule 17a-25 Adopting Release, supra note 20, at 35836.
    \27\ EBS data does not, however, include the time of execution, 
and often does not include the identity of the beneficial owner. See 
infra note 147.
    \28\ A 1990 Senate Report acknowledged the immense value of the 
EBS system, but noted that ``it is designed for use in more narrowly 
focused enforcement investigations that generally relate to trading 
in individual securities. It is not designed for use for multiple 
inquiries that are essential for trading reconstruction purposes.'' 
See S. Rep. No. 300, 101st Cong., 2d Sess. 2-5 (1990), at 48.
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    In 2000, the Commission proposed Rule 17a-25 under the Exchange Act 
to supplement the existing EBS system with data elements incorporating 
institutional and professional trading strategies, to assist regulatory 
staff in reviewing and analyzing EBS data.\29\ Adopted in June 
2001,\30\ the rule codified the requirement that broker-dealers submit 
to the Commission, upon request, information on their customer and 
proprietary securities transactions in an electronic format.\31\ Rule 
17a-25 requires submission of the same standard customer and 
proprietary transaction information that SROs request through the EBS 
system in connection with their market surveillance and enforcement 
inquiries.\32\
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    \29\ See Securities Exchange Act Release No. 42741 (May 2, 
2000), 65 FR 26534 (May 8, 2000) (``Rule 17a-25 Proposing 
Release'').
    \30\ See Rule 17a-25 Adopting Release, supra note 20.
    \31\ Id. at 35836, and 17 CFR 240.17a-25.
    \32\ See e.g. NYSE Rule 410A and FINRA Rule 8211.
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    Specifically, for a proprietary transaction, Rule 17a-25 requires a 
broker-dealer to provide the following information electronically upon 
request: (1) Clearing house number or alpha symbol used by the broker-
dealer submitting the information; (2) clearing house number(s) or 
alpha symbol(s) of the broker-dealer(s) on the opposite side to the 
trade; (3) security identifier; (4) execution date; (5) quantity 
executed; (6) transaction price; (7) account number; (8) identity of 
the exchange or market where the transaction was executed; (9) prime 
broker identifier; (10) average price account identifier; and (11) the 
identifier assigned to the account by a depository institution.\33\ For 
customer transactions, the broker-dealer also is required to include 
the customer's name, customer's address, the customer's tax 
identification number, and other related account information.\34\ The 
new data elements added by Rule 17a-25--prime broker identifiers, 
average price account identifiers, and depository institution account 
identifiers--assist the Commission in aggregating, without double-
counting, securities transactions by entities trading through multiple 
accounts at more than one broker-dealer.\35\
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    \33\ See Rule 17a-25(a)(1) and Rule 17a-25(b)(1)-(3), 17 CFR 
240.17a-25(a)(1) and 17 CFR 240.17a-25(b)(1)-(3).
    \34\ See Rule 17a-25(a)(2), 17 CFR 240.17a-25(a)(2). Rule 17a-25 
also requires broker-dealers to submit, and keep current, contact 
person information for requests under the rule. This provision was 
designed to ensure that the Commission could effectively direct its 
data requests to broker-dealers. See Rule 17a-25 Proposing Release, 
supra note 29, at 26537.
    \35\ This information was deemed especially necessary for the 
creation of massive market reconstructions performed by Commission 
staff. See Rule 17a-25 Adopting Release, supra note 20, at 35836.
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B. Equity Cleared Reports

    In addition to the EBS system and Rule 17a-25, the Commission also 
relies upon the National Securities Clearing Corporation's (``NSCC'') 
\36\ equity cleared report for initial regulatory inquiries.\37\ This 
report is generated on a daily basis by the SROs and is provided to the 
NSCC, in a database accessible by the Commission, and shows the number 
of trades and daily volume of all equity securities in which 
transactions took place, sorted by clearing member. The information 
provided is end of day data and is searchable by security name and 
CUSIP number.\38\ Since the information made available on the report is 
limited to the date, the clearing firm, and the number of transactions 
cleared by each clearing firm on each SRO, it basically serves as a 
starting point for an investigation, providing a tool the Commission 
can use to narrow down which clearing firms to contact concerning a 
transaction in a certain security.
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    \36\ NSCC is a subsidiary of the Deposit Trust and Clearing 
Corporation and provides centralized clearing information and 
settlement services to broker-dealers for trades involving equities, 
corporate and municipal debt, American depository receipts, exchange 
traded funds, and unit investment trusts.
    \37\ The Commission also uses the Options Cleared Report, with 
data supplied by the Options Clearing Corporation (``OCC''), for 
analysis of trading in listed options. OCC is an equity derivatives 
clearing organization that is registered as a clearing agency under 
Section 17A of the Exchange Act and operates under the jurisdiction 
of both the Commission and the Commodities Futures Trading 
Commission (``CFTC'').
    \38\ A CUSIP number is a unique alphanumeric identifier assigned 
to a security and is used to facilitate the clearance and settlement 
of trades in the security.
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C. FINRA's Order Audit Trail System

    In 1996, the Commission instituted public administrative 
proceedings against the NASD, alleging that it failed to enforce and 
investigate potential misconduct by its members.\39\ In settling the 
Commission's enforcement action, the NASD was ordered to design and 
implement an audit trail to enable it to reconstruct its markets 
promptly and effectively surveil them.\40\ The Commission mandated that 
the audit trail at a minimum: (1) Provide an accurate time-sequenced 
record of orders and transactions, beginning with

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the receipt of an order at the first point of contact between the 
broker-dealer and the customer or counterparty, and further documenting 
the life of the order through the process including execution, 
modification and cancellation; and (2) provide for market-wide 
synchronization of clocks used in connection with the new audit trail 
system.\41\ In response to the order, the NASD created OATS.\42\
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    \39\ See In the Matter of National Association of Securities 
Dealers, Inc., Administrative Proceeding File No. 3-9056, Securities 
Exchange Act Release No. 37538 (August 8, 1996) (Order Instituting 
Public Proceedings Pursuant to Section 19(h)(1) of the Securities 
Exchange Act of 1934, Making Findings and Imposing Remedial 
Sanctions).
    \40\ Id. at 11-12.
    \41\ Id.
    \42\ See FINRA Rules 7400 to 7470. See also OATS Approval Order, 
supra note 13.
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    Currently, OATS is used to capture order information reported by 
FINRA members in equity securities listed on the Nasdaq Stock Market, 
Inc. (``Nasdaq'') and OTC equity securities.\43\ OATS requires 
reporting members \44\ to record and report to FINRA \45\ detailed 
information covering the receipt and origination of an order,\46\ order 
terms, transmission, and modification, cancellation and execution.\47\ 
Specifically, for each of these stages in the life of an order, FINRA 
Rule 7440 requires the recording and reporting of the following 
information, as applicable, including but not limited to:
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    \43\ FINRA defines an OTC equity security as any equity security 
that (1) is not listed on a national securities exchange, or (2) is 
listed on one or more regional stock exchanges and does not qualify 
for dissemination of transaction reports via the facilities of the 
Consolidated Tape. See FINRA Rule 7410(l).
    \44\ A reporting member is a member that receives or originates 
an order and has an obligation to record and report information 
under FINRA Rules 7440 and 7450. A member shall not be considered a 
reporting member in connection with an order if the following 
conditions are met: (1) The member engages in a non-discretionary 
order routing process, pursuant to which it immediately routes, by 
electronic or other means, all of its orders to a single reporting 
member; (2) the member does not direct and does not maintain control 
over subsequent routing or execution by the receiving reporting 
member; (3) the receiving reporting member records and reports all 
information required under FINRA Rules 7440 and 7450 with respect to 
the order; and (4) the member has a written agreement with the 
receiving reporting member specifying the respective functions and 
responsibilities of each party to effect full compliance with the 
requirements of Rule 7440 and 7450. See FINRA Rule 7410(o).
    \45\ Each reporting member must record each item of information 
required by OATS in electronic form by the end of each business day. 
See FINRA Rule 7440(a)(3). Reporting members must transmit to OATS a 
report of order information whenever an order is originated, 
received, transmitted to another department within the member or to 
another member, modified, canceled, or executed. Each report shall 
be transmitted on the day such event occurred if the information is 
available that day. Order information reports may be aggregated into 
one or more transmissions. See FINRA Rule 7450(b)(2).
    \46\ OATS recording and reporting requirements apply to any 
oral, written, or electronic instruction to effect a transaction in 
an equity security listed on the Nasdaq Stock Market or an OTC 
equity security that is received by a member from another person for 
handling or execution, or that is originated by a department of a 
member for execution by the same or another member, other than any 
such instruction to effect a proprietary transaction originated by a 
trading desk in the ordinary course of a member's market making 
activities. See FINRA Rule 7410(j).
    \47\ See FINRA Rules 7440 and 7450.
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     For the receipt or origination of the order,\48\ the date 
and time the order was first originated or received by the reporting 
member; a unique order identifier; the market participant symbol of the 
receiving reporting member; and the material terms of the order;\49\
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    \48\ FINRA Rule 7440 also requires reporting of the account 
type; the identification of the department or terminal where an 
order is received from a customer; the identification of the 
department or terminal where an order is originated by a reporting 
member; and the identification of a reporting agent if the agent has 
agreed to take on the responsibilities of a reporting member under 
Rule 7450. See FINRA Rule 7440(b).
    \49\ The specific information required to be reported includes: 
The number of shares; designation as a buy or sell or short sale; 
designation of the order as market, limit, stop, or stop limit; 
limit or stop price; date on which the order expires and if the time 
in force is less than one day, the time when the order expires; the 
time limit during which the order is in force; any request by a 
customer that an order not be displayed, or that a block size be 
displayed, pursuant to Rule 604(b) of Regulation NMS; any special 
handling requests; and identification of the order as related to a 
program trade or index arbitrage trade. See FINRA Rule 7440(b).
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     For the internal or external routing of an order, the 
unique order identifier; the market participant symbol of the member to 
which the order was transmitted; the identification and nature of the 
department to which the order was transmitted if transmitted 
internally; the date and time the order was received by the market 
participant or department to which the order was transmitted; the 
material terms of the order as transmitted; \50\ the date and time the 
order is transmitted; and the market participant symbol of the member 
who transmitted the order;
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    \50\ The specific information required includes the number of 
shares to which the transmission applies, and whether the order is 
an intermarket sweep order. See FINRA Rule 7440(c).
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     For the modification or cancellation of an order, a new 
unique order identifier; original unique order identifier; the date and 
time a modification or cancellation was originated or received; and the 
date and time the order was first received or originated; \51\ and
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    \51\ For cancellations or modification, the following 
information also is required: If the open balance of an order is 
canceled after a partial execution, the number of shares canceled; 
and whether the order was canceled on the instruction of a customer 
or the reporting member. See FINRA Rule 7440(d).
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     For the execution of an order, in whole or in part, the 
unique order identifier; the designation of the order as fully or 
partially executed; the number of shares to which a partial execution 
applies and the number of unexecuted shares remaining; the date and 
time of execution; the execution price; the capacity in which the 
member executed the transaction; the identification of the market where 
the trade was reported; and the date and time the order was originally 
received.\52\
---------------------------------------------------------------------------

    \52\ For executions, the reporting member also must report its 
market participant symbol; its number assigned for purposes of 
identifying transaction data; and the identification number of the 
terminal where the order was executed. See FINRA Rule 7440(d).
---------------------------------------------------------------------------

FINRA uses this information to recreate daily market activity for 
FINRA's market surveillance activities.\53\
---------------------------------------------------------------------------

    \53\ See OATS Reporting Technical Specifications, January 5, 
2010, available at http://www.finra.org/web/groups/industry/@ip/
@comp/@regis/documents/appsupportdocs/p120686.pdf.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \54\ See In the Matter of New York Stock Exchange, Inc., 
Administrative Proceeding File No. 3-9925, Securities Exchange Act 
Release No. 41574 (June 29, 1999) (Order Instituting Public 
Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange 
Act of 1934, Making Findings and Ordering Compliance with 
Undertakings), at 4-5.
    \55\ Id. at 28-29.
    \56\ Id.
---------------------------------------------------------------------------

    In response to the Commission's order, the NYSE created OTS.\57\ 
OTS currently is used for the provision of audit trail data for orders 
\58\ in NYSE

[[Page 32560]]

and NYSE Amex-listed cash equity securities by NYSE and NYSE Amex 
members, including for orders in NYSE or NYSE Amex-listed cash equity 
securities initiated by a NYSE or NYSE Amex member or routed by a NYSE 
or NYSE Amex member to another market center for execution.\59\ OTS is 
similar in scope to OATS, as detailed information is required to be 
recorded for the stages of an order's life, from origination and 
receipt and transmittal, through order modification, cancellation, and/
or execution.\60\ Specifically, for each of these stages in the life of 
an order, OTS requires the recording of the following information, as 
applicable, including but not limited to:
---------------------------------------------------------------------------

    \57\ See NYSE Rule 132B, and OTS Approval Order, supra note 14.
    \58\ OTS is applicable to all orders in NYSE-listed securities, 
regardless of account type (firm or customer). See NYSE Rule 
132B(a)(1).
    \59\ See Securities Exchange Act Release No. 59022 (November 26, 
2008), 73 FR 73683 (December 3, 2008). NYSE Alternext adopted NYSE 
Rules 1-1004 as the NYSE Alternext Equities Rules to govern all cash 
equities trading on the NYSE Alternext Trading Systems and NYSE 
Alternext Bonds. In March 2009, NYSE Alternext changed its name to 
NYSE Amex LLC (``NYSE Amex'') (the successor to Amex, see infra note 
73). See Securities Exchange Act Release No. 59575 (March 13, 2009), 
74 FR 11803 (March 19, 2009).
    \60\ See NYSE Rule 132B and NYSE Amex Equities Rule 132B. Each 
member or member organization shall, by the end of each business 
day, record each item of information required to be recorded under 
the rule in such electronic form as is prescribed by the NYSE (or 
NYSE Amex) from time to time. See NYSE Rule 132B(a)(3) and NYSE Amex 
Equities Rule 132B(a)(3). Members and member organizations shall be 
required to transmit to the NYSE or NYSE Amex, in such format as the 
applicable exchange may from time to time prescribe, such order 
tracking information as the exchange may request. See NYSE Rule 132C 
and NYSE Amex Equities Rule 132C.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \61\ Members are also required to report: The identification of 
the department or terminal where an order is received directly from 
a customer; and where the order is originated by a member or member 
organization, the identification of the department (if appropriate) 
of the member that originated the order. See NYSE Rule 132B(b) and 
NYSE Amex Equities Rule 132B(b).
    \62\ The specific information required to be reported includes: 
Number of shares; designation of the order as a buy or sell; 
designation of the order as a short sale; designation of the order 
as a market order, limit order, auction market order, stop order, 
auction stop order, or ISO; security symbol; limit or stop price; 
type of account; the date on which the order expires, and, if the 
time in force is less than one day, the time when the order expires; 
the time limit during which the order is in force; any request by a 
customer that an order not be displayed pursuant to Rule 604(c) 
under the Exchange Act; and special handling requests. See NYSE Rule 
132B(b) and NYSE Amex Equities Rule 132B(b).
---------------------------------------------------------------------------

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

    \63\ The information required to be reported also includes 
whether the order was transmitted and received manually or 
electronically; the date the order was first originated or received 
by the transmitting member or member organization; and, for each 
order to be included in a bunched order, the bunched order route 
indicator assigned to the bunched order. See NYSE Rule 132B(c) and 
NYSE Amex Equities Rule 132B(c).
    \64\ The information required to be reported includes the number 
of shares to which the transmission applies. See NYSE Rule 132B(c) 
and NYSE Amex Equities Rule 132B(c).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \65\ For cancellations or modifications, the following 
information also is required: The order identifier assigned to the 
order prior to modification; if the open balance of an order is 
canceled after a partial execution, the number of shares canceled; 
and whether the order was canceled on the instruction of a customer 
or the member or member organization. See NYSE Rule 132B(d) and NYSE 
Amex Equities Rule 132B(d).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \66\ See NYSE Rule 123 and NYSE Amex Equities Rule 123, each of 
which require, among other things, a record of the cancellation of 
an order, which must include the time the cancellation was entered, 
and a record of the receipt of an execution report, which must 
include the time of receipt of the report.
    \67\ The specific information required includes the security 
symbol; quantity; side of the market; whether the order is a market, 
auction market, limit, stop, or auction limit order; any limit or 
stop price, discretionary price range, discretionary volume range, 
discretionary quote price, pegging ceiling price, pegging floor 
price and/or whether discretionary instructions are active in 
connection with interest displayed by other market centers; time in 
force; designation as held or not held; and any special conditions. 
See NYSE Rule 123(e) and NYSE Amex Equities Rule 123(e).
    \68\ The required information also includes the system-generated 
time of recording order details. See NYSE Rule 123(e) and NYSE Amex 
Equities Rule 123(e).
    \69\ See NYSE Rule 123(e) and NYSE Amex Equities Rule 123(e).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \70\ The specific information required includes security symbol; 
quantity; transaction price; and execution time. See NYSE Rule 
123(f) and NYSE Amex Equities Rule 123(f).
    \71\ The specific information required includes the executing 
broker badge number or alpha symbol; the contra side executing 
broker badge number or alpha symbol; the clearing firm number or 
alpha; and the contra side clearing firm number or alpha. See NYSE 
Rule 123(f) and NYSE Amex Equities Rule 123(f).
    \72\ The required information includes whether the account for 
which the order was executed was that of a member or member 
organization or non-member or non-member organization; the 
identification of member or member organization which recorded order 
details; the date the order was entered into an exchange system; an 
indication as to whether this is a modification to a previously 
submitted report; settlement instructions; special trade indication 
(if applicable); and the Online Comparison System control number. 
See NYSE Rule 123(f) and NYSE Amex Equities Rule 123(f).
---------------------------------------------------------------------------

E. Consolidated Options Audit Trail System

    In September 2000, the Commission instituted public administrative 
proceedings against Amex,\73\ CBOE, the Pacific Exchange,\74\ and the 
Philadelphia Stock Exchange \75\ for failing to uphold their 
obligations to enforce compliance with exchange rules and the federal 
securities laws, including those relating to reporting. Specifically, 
the Commission alleged that they had either conducted no

[[Page 32561]]

automated surveillance, or inadequate automated surveillance, of trade 
reporting and consequently failed to adequately detect noncompliance 
with their rules.\76\ In settling the Commission's enforcement action, 
the exchanges were required to jointly design and implement COATS to 
enable them to reconstruct markets promptly, surveil them, and enforce 
compliance with trade reporting, firm quote, order handling, and other 
rules.\77\ The exchanges were required to complete this undertaking in 
five phases.\78\
---------------------------------------------------------------------------

    \73\ Amex was acquired by NYSE Euronext on October 1, 2008. 
Initially, the successor entity to Amex was established as NYSE 
Alternext U.S. LLC, but the name was changed in 2009 to NYSE Amex. 
See Securities Exchange Act Release No. 59575 (March 13, 2009), 74 
FR 11803 (March 19, 2009).
    \74\ In 2001, the Archipelago Exchange LLC (``ArcaEx'') was 
established as an electronic trading facility for Pacific Exchange's 
subsidiary PCX Equities, Inc. (``PCX Equities''). See Securities 
Exchange Act Release No. 44983 (October 25, 2001), 66 FR 55225 
(November 1, 2001). In 2005, Archipelago Holdings, Inc., the parent 
company of ArcaEx, acquired PCX Holdings, Inc., which included 
subsidiaries Pacific Exchange (PCX) and PCX Equities. See Securities 
Exchange Act Release No. 52497 (September 22, 2005), 70 FR 56949 
(September 29, 2005). The NYSE merged with Archipelago Holdings in 
2006. See Securities Exchange Act Release No. 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006). NYSE Arca is the successor to 
PCX.
    \75\ The Philadelphia Stock Exchange was acquired by The NASDAQ 
OMX Group, Inc. in 2008, and is now called NASDAQ OMX Phlx 
(``Phlx''). See Securities Exchange Act Release No. 58179 (July 17, 
2008), 73 FR 42874 (July 23, 2008).
    \76\ See Options Settlement Order, supra note 15, at 12.
    \77\ Id. at 22.
    \78\ Id. at 22-25.
---------------------------------------------------------------------------

    In particular, each exchange was required to achieve the following 
through its audit trail: (1) Synchronize trading and support system 
clocks with all other options exchanges; (2) design and implement a 
method to merge all options exchanges' reported and matched transaction 
data on a daily basis in a common computer format; (3) incorporate its 
quotations and the national best bid and offer as displayed in its 
market with the merged transaction data so that it could be promptly 
retrieved and merged in the common computer format with other options 
exchanges' merged transactions and quotation data; (4) design and 
implement an audit trail readily retrievable (in the common computer 
format) providing an accurate, time-sequenced record of electronic 
orders, quotations and transactions on such exchange, beginning with 
the receipt of an electronic order, and further documenting the life of 
the order through the process of execution, partial execution, or 
cancellation; (5) incorporate into the audit trail all non-electronic 
orders so that such orders were also subject to the audit trail 
requirements for electronic orders; and (6) design effective 
surveillance systems to use this newly available data to enforce the 
Federal securities laws and the exchange's rules.\79\
---------------------------------------------------------------------------

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

    The exchanges subject to the Options Settlement Order fully 
implemented the requirements in 2005. In addition, the International 
Securities Exchange, LLC (``ISE''), Boston Options Exchange Group, LLC 
(``BOX''), the Nasdaq Options Market (``NOM''), and BATS Options 
Exchange Market (``BATS Options'') also comply with the COATS 
requirements.\80\
---------------------------------------------------------------------------

    \80\ See Securities Exchange Act Release Nos. 61154 (December 
11, 2009), 74 FR 67278 (December 18, 2009), at 67280 (stating ``ISE 
and the other options exchanges are required to populate a 
consolidated options audit trail (``COATS'') system in order to 
surveil member activities across markets''); 61388 (January 20, 
2010), 75 FR 4431 (January 27, 2010), at 4433 (Nasdaq OMX BX filing 
amending BOX's fee schedule, with similar language as Release No. 
61154); and 61419 (January 26, 2010), 75 FR 5157 (February 1, 2010) 
(BATS Exchange, Inc. (``BATS'') represented that BATS Options would 
comply with the specifications of COATS in submitting data to create 
a consolidated audit trail, as well as receiving COATS data for its 
own surveillance purposes).
---------------------------------------------------------------------------

    A majority of options exchanges require their members to provide 
the following information with respect to orders entered onto their 
exchange: (1) The material terms of the order; \81\ (2) order receipt 
time; \82\ (3) account type; (4) the time a modification is received; 
(5) the time a cancellation is received; (6) execution time; and (7) 
the clearing member identifier of the parties to the transaction.\83\
---------------------------------------------------------------------------

    \81\ The specific information required includes option symbol; 
underlying security; expiration month; exercise price; contract 
volume; call/put; buy/sell; opening/closing transaction; price or 
price limit; and special instructions.
    \82\ The required information also includes identification of 
the terminal or individual completing the order ticket.
    \83\ See e.g. BATS Rule 20.7; BOX Chapter V, Section 15; CBOE 
Chapter VI, Rules 6.24 and 6.51; NOM Rule Chapter V, Section 7; NYSE 
Amex Rules 153, Commentary .01, and 962; NYSE Arca Rules 6.67, 6.68, 
and 6.69; and Phlx Rules 1063 and 1080.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \84\ For purposes of this release, the Commission does not 
consider SRO EBS rules to be audit trail rules.
    \85\ See Chicago Stock Exchange (``CHX'') Article 11, Rule 3(b); 
FINRA Rules 7400 to 7470 (the OATS rules); Nasdaq Rules 6950 to 6958 
(substantially similar to the OATS rules); BX Rules 6950 to 6958 
(substantially similar to OATS rules); NYSE Rule 123 and 132B; and 
NYSE Amex Equities Rule 123 and 132B (OTS rules). See supra Sections 
I.C. and I.D. for a discussion of FINRA's OATS rules and the NYSE 
and NYSE Amex's OTS rules, respectively.
    \86\ See CHX Article 11, Rule 3(b).
---------------------------------------------------------------------------

     Information relating to receipt or transmission of the 
order, including the material terms of the order; \87\ a unique order 
identifier; the identification of the clearing participant and the 
participant recording the order details; the date and time of order 
receipt or transmission (if applicable); the market or participant to 
which the order was transmitted or from which the order was received 
(if applicable);
---------------------------------------------------------------------------

    \87\ Id. The specific information required includes the symbol; 
number or shares or quantity of security; side of the market; order 
type; limit and/or stop price; whether the order is agency or 
proprietary; whether an order is a bona fide arbitrage order; 
whether the order is short; time in force; designation as held or 
not held; any special conditions or instructions (including any 
customer display instructions and any all-or-none conditions); and 
the date and time of any order expiration.
---------------------------------------------------------------------------

     Information relating to modifications to or cancellation 
of the order, including any modifications to the order, any 
cancellation of all or part of the order; the date and time of receipt 
and transmission of any modifications to the order or cancellations; 
and the identification of the party canceling or modifying the order; 
\88\
---------------------------------------------------------------------------

    \88\ Id.
---------------------------------------------------------------------------

     For executions of the order,\89\ in whole or in part, the 
transaction price; the number of shares or quantity executed; the date 
and time of execution; the contra party to the execution; and any 
settlement instructions.\90\
---------------------------------------------------------------------------

    \89\ Id.
    \90\ Id. The participant also must record the system-generated 
times of recording this required information. This information must 
be recorded immediately after the information is received or becomes 
available. CHX Article 11, Rule 3(c). Additionally, before any such 
orders are executed, exchange participants must record the name or 
designation of the account for which the order is being executed. 
CHX Article 11, Rule 3(d). This rule does not apply to orders sent 
or received through the exchange's matching system or any other 
electronic systems the exchange recognizes as providing the required 
information in a format acceptable to the exchange. See CHX Article 
11, Rule 3, Interpretations and Policies .03.
---------------------------------------------------------------------------

    The audit trail rules of the other exchanges incorporate only 
standard books and records requirements in accordance with Section 17 
of the Exchange Act.\91\
---------------------------------------------------------------------------

    \91\ See e.g. National Stock Exchange (``NSX'') Chapter VI, Rule 
4.1.; BATS Chapter IV, Rule 4.1; CBOE Rule 15.1 (applicable to 
CBSX); ISE Stock Exchange Rule 1400; NYSE Arca Equities Rule 2.24; 
15 U.S.C. 78q et seq. For example, one exchange only requires its 
members to make and keep books and records and other correspondence 
in conformity with Section 17 of the Exchange Act and the rules 
thereunder, with all other applicable laws and the rules, 
regulations and statements of policy promulgated thereunder, and 
with the exchange's rules. See NSX Chapter VI, Rule 4.1.
---------------------------------------------------------------------------

G. Prior Commission Request for Comment

    The Commission has previously requested comment regarding cross-

[[Page 32562]]

market regulation, including whether changes should be made to existing 
audit trail rules, in two concept releases in 2003 and 2004.\92\
---------------------------------------------------------------------------

    \92\ See Securities Exchange Act Release Nos. 47849 (May 14, 
2003), 68 FR 27722 (May 20, 2003) (File No. S7-11-03) (``Intermarket 
Trading Concept Release'') and 50700 (November 18, 2004), 69 FR 
71256 (December 8, 2004) (File No. S7-40-04) (``Concept Release 
Concerning Self-Regulation'').
---------------------------------------------------------------------------

    In 2003, the Commission sought public comment on a petition 
submitted by Nasdaq that raised concerns about the impact of market 
fragmentation on the trading in, and regulation of trading in, Nasdaq-
listed securities.\93\ Nasdaq, through OATS, collected data from its 
members trading Nasdaq-listed securities, which the NASD then used to 
surveil for potential rule violations.\94\ Nasdaq requested that the 
Commission require all SROs trading Nasdaq-listed securities to 
implement an electronic audit trail identical to OATS.\95\ Nasdaq also 
noted that the available cross-market audit trail information provided 
by the Intermarket Surveillance Group (``ISG'') \96\ was comprised of 
audit trail information from each of the exchanges and provided two day 
delayed data at the clearing firm level, with time data from non-
synchronized clocks.\97\ Nasdaq believed that the information provided 
by ISG was insufficient to identify potentially violative activity.\98\
---------------------------------------------------------------------------

    \93\ See letter to Jonathan G. Katz, Secretary, Commission, from 
Edward Knight, Executive Vice President and General Counsel, Nasdaq, 
dated April 11, 2003 (File No. 4-479) (``Nasdaq Petition''). In 
particular, Nasdaq was concerned over what it deemed ``unequal and 
inadequate regulation'' by other markets trading Nasdaq-listed 
securities. Id. at 2. See also Intermarket Trading Concept Release, 
supra note 92, at 27223.
    \94\ See Nasdaq Petition, supra note 93, at 10, and Intermarket 
Trading Concept Release, supra note 92, at 27224.
    \95\ See Nasdaq Petition, supra note 93, at 11, and Intermarket 
Trading Concept Release, supra note 92, at 27224.
    \96\ The ISG was created in 1983 and its members include all of 
the registered national securities exchanges and FINRA. ISG states 
that its goals are to enhance intermarket surveillance, assure the 
integrity of trading, and provide investor protection. To achieve 
these goals, ISG members share data such as audit trail information 
and short interest data among themselves. ISG provides surveillance 
tools to supplement its participant members' existing surveillance 
systems, such as the ISG Unusual Activity Report and the 
Consolidated Equity Audit Trail. These reports are made available 
from SIAC to members of ISG and are intended to provide a 
consolidated view across all markets of trade, quote, and clearing 
activity. See comment letter from Brian F. Colby, Chairman, 
Intermarket Surveillance Group, to Jonathan G. Katz, Secretary, 
Commission, dated June 18, 2003 (``ISG 2003 Comment Letter'') 
(commenting in response to the Intermarket Trading Concept Release).
    \97\ See Nasdaq Petition, supra note 93, at 10, and Intermarket 
Trading Concept Release, supra note 92, at 27224.
    \98\ See Nasdaq Petition, supra note 93, at 10-11, and 
Intermarket Trading Concept Release, supra note 92, at 27224.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \99\ See comment letters from Darla C. Stuckey, Corporate 
Secretary, NYSE, to Jonathan G. Katz, Secretary, Commission, dated 
June 19, 2003 (``NYSE Comment Letter''); Jeffrey T. Brown, General 
Counsel, Cincinnati Stock Exchange, to Jonathan G. Katz, Secretary, 
Commission, dated June 19, 2003 (``CSE Comment Letter''); Michael J. 
Simon, Senior Vice President and Secretary, International Securities 
Exchange, Inc., to Jonathan G. Katz, Secretary, Commission, dated 
June 19, 2003 (``ISE Comment Letter''); William O'Brien, Chief 
Operating Officer, Brut, LLC, to Jonathan G. Katz, Secretary, 
Commission, dated June 19, 2003 (``Brut Comment Letter''); Kim Bang, 
President, Bloomberg Tradebook LLC, to Jonathan G. Katz, Secretary, 
Commission, dated June 20, 2003 (``Bloomberg Tradebook Comment 
Letter''); Donald D. Kittell, Executive Vice President, Securities 
Industry Association, to Jonathan G. Katz, Secretary, Commission, 
dated June 27, 2003 (``SIA Comment Letter''); Edward J. Joyce, 
President and Chief Operating Officer, CBOE, to Jonathan G. Katz, 
Secretary, Commission, dated June 30, 2003 (``CBOE Comment 
Letter''); W. Hardy Callcott, Senior Vice President and General 
Counsel, Charles Schwab & Co., Inc., to Jonathan G. Katz, Secretary, 
Commission, dated July 7, 2003 (``Schwab Comment Letter''); Richard 
Ketchum, General Counsel, Citigroup, to Jonathan G. Katz, Secretary, 
Commission, dated July 8, 2003 (``Citigroup Comment Letter''); John 
S. Markle, Associate General Counsel, Ameritrade Holding Corp., to 
Jonathan G. Katz, Secretary, Commission, dated July 10, 2003 
(``Ameritrade Comment Letter''); and Eric Schwartz, Managing 
Director, Goldman Sachs, and Duncan Niederauer, Co-Chief Executive 
Officer, Spear, Leeds & Kellogg, to Jonathan G. Katz, Secretary, 
Commission, dated July 25, 2003 (``Goldman Sachs and Spear, Leeds & 
Kellogg Comment Letter'').
    \100\ Of the commenters that clearly commented on the creation 
of a uniform intermarket audit trail, Citigroup and Goldman Sachs 
and Spear, Leeds & Kellogg were in favor of the idea, and Bloomberg 
supported a consolidated audit trail for those SROs trading Nasdaq-
listed securities. See Citigroup Comment Letter, supra note 99, at 
6; Goldman Sachs and Spear, Leeds & Kellogg Comment Letter, supra 
note 99, at 3-4; and Bloomberg Tradebook Comment Letter, supra note 
99, at 3. Brut, CBOE, and the NYSE did not appear to be in favor of 
a standardized intermarket audit trail. See Brut Comment Letter, 
supra note 99, at 5 (arguing for addressing improvements to 
surveillances falling short of Exchange Act requirements 
individually instead of ``costly and comprehensive technology 
overhauls''); CBOE Comment Letter, supra note 99, at 2 (explaining 
that it ``supports expanding the use of existing tools and enhancing 
[SRO] and Commission coordination to strengthen surveillance and to 
achieve more uniform regulation * * *'' and noting that the 
Commission could ``play a significant role in achieving uniform SRO 
regulation [by] establishing guiding principles on a variety of 
areas that affect all SROs.'' CBOE also noted that there should be 
enhanced coordination of SRO regulatory efforts through ISG and 
through 17d-2 agreements); and NYSE Comment Letter, supra note 99, 
at 5 (suggesting linking SRO audit trails in the manner of the ISG 
Consolidated Audit Trail).
---------------------------------------------------------------------------

    One commenter expressed the view that once broker-dealers have 
implemented systems necessary to comply with audit trail requirements, 
it would not be incrementally significant from a cost perspective to 
supply the same data in a common format to additional SROs, but that 
there would be a significant cost if the data to be captured and the 
methods of encoding and delivering the data differed from market to 
market.\101\ This commenter urged the Commission, if it were to require 
all market centers to adopt audit trail requirements, to ensure that 
the requirements are uniform and standardized. This commenter 
recommended a single standard for real time electronic trade and audit 
trail reporting, which would be applicable to all equity securities 
traded in the national market regardless of where listed or traded, and 
where data would be captured in a central depository, aggregated and 
made immediately available to each relevant market center, possibly 
through direct electronic data feeds.\102\ Likewise, another commenter 
stated that it would be preferable for there to be one uniform audit 
trail system, rather than each SRO adopting its own audit trail 
requirements and systems, to reduce the potential for conflicting rules 
and regulations and duplicative systems and technology 
requirements.\103\ Another commenter recommended that if the Commission 
determined that the need for a particular SRO to have enhanced audit 
trail information outweighs costs to member firms, SROs be required to 
coordinate efforts so as to reduce duplication of systems and 
regulatory efforts.\104\
---------------------------------------------------------------------------

    \101\ See Goldman Sachs and Spear, Leeds & Kellogg Comment 
Letter, supra note 99, at 3.
    \102\ Id at 4.
    \103\ See Citigroup Comment Letter, supra note 99, at 6.
    \104\ See SIA Comment Letter, supra note 99, at 4. One commenter 
agreed that the Commission would be justified in requiring all SROs 
trading Nasdaq-listed securities to coordinate electronic audit 
trail systems with the NASD. See Bloomberg Tradebook Comment Letter, 
supra note 99. On the other hand, one commenter stated its belief 
that if there is a legitimate need to improve on the ISG audit 
trail, the markets should act jointly to do so, without being forced 
to adopt Nasdaq's proprietary audit trail. See ISE Comment Letter, 
supra note 99.
---------------------------------------------------------------------------

    Several commenters urged the Commission to consider the costs to 
broker-dealer firms of supplying the audit trail data when considering 
the appropriateness of extending OATS-like audit trail requirements to 
other market centers.\105\ One commenter stated the

[[Page 32563]]

belief that firms already are required to maintain all of the customer 
and transaction information that regulators would want under their 
current books and records requirements and that most firms do not 
believe there is a justification for requiring firms to spend the money 
necessary to send this information to every market center where an 
order may be routed.\106\ Another commenter was concerned about the 
impact on each individual market's structure of mandating 
uniformity.\107\
---------------------------------------------------------------------------

    \105\ See SIA Comment Letter, supra note 99, at 4; Goldman Sachs 
and Spear, Leeds & Kellogg Comment Letter, supra note 99, at 3 
(stating that any decision about extending OATS to other markets 
should take into account the costs imposed on SROs, market 
intermediaries and the markets); and Ameritrade Comment Letter, 
supra note 99, at 3.
    \106\ See SIA Comment Letter, supra note 99, at 4.
    \107\ See CSE Comment Letter, supra note 99, at 6-7 (noting that 
the data formats among exchanges may vary due to structural needs 
and system designs; thus, while this commenter advocated that 
exchanges should be required to have internal audit trails tracking 
orders from inception to execution, it argued that design 
flexibility be maintained so that exchanges could create the audit 
trail systems best suited to monitor their markets).
---------------------------------------------------------------------------

    Some commenters supported the ISG as a facilitator of a coordinated 
regulation.\108\ One commenter noted that the ISG Consolidated Equity 
Audit Trail was a valuable supplement to existing SRO market data.\109\ 
One commenter also endorsed the ISG audit trail as well as CSE's Firm 
Order Submission system,\110\ stating that it was preferable to enhance 
these systems rather than conduct a ``mass migration'' to OATS.\111\ 
The ISG itself stated that no other market had reported any problems 
with ISG's timing of the incorporation of the clearing data into the 
Consolidated Equity Audit Trail, nor with the delivery of its audit 
trail information.\112\
---------------------------------------------------------------------------

    \108\ See Ameritrade Comment Letter, supra note 99, at 2; CSE 
Comment Letter, supra note 99, at 13; ISE Comment Letter, supra note 
99, at 4; and NYSE Comment Letter, supra note 99, at 3.
    \109\ See NYSE Comment Letter, supra note 99.
    \110\ In its comment letter, CSE stated that its Firm Order 
Submission system (``FOS'') was more comprehensive than OATS and 
that the exchange had pioneered order audit trail development. See 
CSE Comment Letter, supra note 99. In its petition, Nasdaq argued 
that FOS was used voluntarily for settling commercial disputes 
between traders and was not meant for surveillance. See Nasdaq 
Petition, supra note 93, at 4.
    \111\ See Brut Comment Letter, supra note 99, at 6.
    \112\ See ISG 2003 Comment Letter, supra note 99.
---------------------------------------------------------------------------

    In 2004, in a release seeking comment on a variety of issues 
relating to self-regulation, the Commission again sought public comment 
on intermarket surveillance.\113\ The Commission discussed the 
individual audit trails developed by several equity markets, COATS, and 
ISG's clearing level audit trail.\114\ The Commission suggested that a 
more robust intermarket order audit trail for options and equity 
markets could enhance the surveillance of order flow and requested 
comment on the issue.\115\
---------------------------------------------------------------------------

    \113\ See Concept Release Concerning Self-Regulation, supra note 
92, at Sections IV.C and V.A.2.
    \114\ Id.
    \115\ Id. at 71277.
---------------------------------------------------------------------------

    One commenter on the Concept Release Concerning Self-Regulation 
stated that, because trading in most liquid securities now occurs on 
multiple markets, no single SRO could capture a complete picture of all 
the trading in each product, all trading by one broker-dealer, and even 
all the trading related to a single order.\116\ This commenter stated 
its belief that the lack of uniform order and transaction data creates 
regulatory gaps and may provide incentives for market participants to 
conduct activities on markets where less regulatory data is collected 
on an automated basis.\117\ This commenter believed that minimum data-
collection standards should be required to ensure adequate regulation 
across all markets, and that consolidating that data would permit 
effective intermarket regulation while ensuring that no single market 
has a competitive advantage.\118\
---------------------------------------------------------------------------

    \116\ See comment letter from Robert R. Glauber, Chairman and 
Chief Executive Officer, NASD, to Jonathan G. Katz, Secretary, 
Commission, dated March 15, 2005 (``NASD Comment Letter''), at 10.
    \117\ Id. at 11.
    \118\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \119\ See comment letter from Mary Yeager, Secretary, NYSE, to 
Jonathan G. Katz, Secretary, Commission, dated March 8, 2005, at 8.
    \120\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \121\ See comment letter from Rebecca T. McEnally, Director, and 
Linda L. Rittenhouse, Senior Policy Analyst, Centre for Financial 
Market Integrity, to Nancy M. Morris, Secretary, Commission, dated 
July 14, 2006, at 6.
    \122\ See comment letter from Kim Bang, Chief Executive Officer, 
Bloomberg L.P., to Jonathan G. Katz, Secretary, Commission, dated 
March 8, 2005, at 4.
    \123\ See comment letter from Meyer S. Frucher, Chairman and 
Chief Executive Officer, Philadelphia Stock Exchange, to Jonathan G. 
Katz, Secretary, Commission, dated March 9, 2005, at 3.
---------------------------------------------------------------------------

II. Basis for Proposed Rule

    As noted above, the U.S. securities markets have experienced a 
dynamic transformation in recent years. Rapid technological advances 
and regulatory developments have produced fundamental changes in the 
structure of the securities markets, the types of market participants, 
the trading strategies employed, and the array of products traded. 
Trading of securities has become more dispersed among exchanges and 
various other trading venues, including the OTC market. The markets 
have become even more competitive, with exchanges and other trading 
centers aggressively competing for order flow by offering innovative 
order types, new data products and other services, and through fees 
charged or rebates provided by the markets. The Commission 
preliminarily believes that with today's fast, electronic and 
interconnected markets, there is a heightened need for a single uniform 
electronic cross-market order and execution tracking system that 
includes more information than is captured by the existing SRO audit 
trails, and in a uniform format. Such a system would enable SROs to 
better fulfill their regulatory responsibilities to monitor for and 
investigate illegal activity in their markets and by their members. 
Further, the Commission preliminarily believes that such a system would 
enable the Commission staff to better carry out its

[[Page 32564]]

oversight of the NMS for securities and to perform market analysis in a 
more timely fashion, whether on one market or across markets.
    Each national securities exchange and national securities 
association must be organized and have the capacity to comply, and 
enforce compliance by its members, with its rules, and with the federal 
securities laws, rules, and regulations.\124\ The Commission 
preliminarily believes that the exchanges and FINRA could more 
effectively and efficiently fulfill these statutory obligations if the 
SROs had direct, electronic real time access to consolidated and more 
detailed order and execution information across all markets.\125\ 
Likewise, the Commission has the statutory obligation to oversee the 
exchanges and associations,\126\ and to enforce compliance by the 
members of exchanges and associations with the respective exchange's or 
association's rules, and the federal securities laws and 
regulations.\127\ The Commission also preliminarily believes that 
electronic real time access to consolidated information and more 
detailed cross-market order and execution information also would aid 
the Commission in carrying out its statutory obligations.
---------------------------------------------------------------------------

    \124\ See, e.g., Sections 6(b)(1), 19(g)(1) and 15A(b)(2) of the 
Exchange Act, 15 U.S.C. 78f(b)(1), 78s(g)(1), and 78o-3(b)(2).
    \125\ The Commission notes that, if adopted as proposed, its 
Large Trader Proposal would not amend or impact the scope of any of 
the existing SRO audit trail rules. See Large Trader Proposal, supra 
note 11.
    \126\ See, e.g., Sections 2, 6(b), 15A(b), and 19(h)(1) of the 
Exchange Act, 15 U.S.C. 78b, 15 U.S.C. 78f(b), 15 U.S.C. 78o-3(b), 
and 15 U.S.C. 78s(h)(1).
    \127\ See, e.g., Section 19(h)(1) of the Exchange Act, 15 U.S.C. 
78s(h)(1).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \128\ See Section 11A(a)(3)(B) of the Exchange Act, 15 U.S.C. 
78k-1(a)(3)(B).
    \129\ See infra Section III for a description of proposed Rule 
613.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \130\ See, e.g., Sections 6(b)(1) and 19(h) of the Exchange Act, 
15 U.S.C. 78f(b)(1) and 78s(h).
    \131\ See Section 9 of the Exchange Act, 15 U.S.C. 78i.
    \132\ See Section 10 of the Exchange Act, 15 U.S.C. 78j.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \133\ See infra Section VI.A (discussion of benefits of the 
proposed Rule).
    \134\ Id.
---------------------------------------------------------------------------

    The Commission recognizes that SRO rules requiring members to 
capture and disclose audit trail information already exist, and 
considered whether more modest improvements to existing rules, and 
corresponding SRO and member systems, would achieve the proposed Rule's 
objective at lower cost. For example, the Commission considered whether 
to standardize and expand the order information collected by existing 
audit trails, the EBS system, Rule 17a-25 and equity cleared reports. 
Without centralization of the trading data in a uniform electronic 
format, however, the Commission's goals of cross-market comparability 
and ready access could not be achieved. Additionally, this approach 
would not resolve concerns over how long it takes to obtain order and 
execution information because the data is often not available in real 
time and is provided only upon request.\135\ Similarly, the Commission 
considered whether assuring access to existing audit trails to other 
SROs and the Commission would sufficiently advance its goals. Even if 
SROs could view order activity on a real time basis on other exchanges, 
this would not eliminate the need for SROs to check multiple 
repositories to view and obtain order information. Moreover, the 
information may be captured, stored and displayed in a variety of 
formats, making comparisons more difficult. The Commission, therefore, 
preliminarily does not believe that ``retrofitting'' existing rules and 
systems would be a more effective way to achieve the goals of the 
proposed consolidated audit trail than having the requirements 
contained in a single Commission rule, and a single NMS plan.
---------------------------------------------------------------------------

    \135\ See infra note 149.
---------------------------------------------------------------------------

    As discussed below, the Commission preliminarily believes that 
existing audit trails are limited in their scope and effectiveness in 
varying ways. SRO and Commission staff also currently obtain 
information about orders or trades through the EBS system, Rule 17a-
25,\136\ and from equity cleared reports.\137\ However, as discussed 
below, the information provided pursuant to the EBS system, Rule 17a-
25, and the equity cleared reports also is limited, to varying degrees, 
in detail and scope.
---------------------------------------------------------------------------

    \136\ 17 CFR 240.17a-25.
    \137\ See supra Sections I.A. and I.B. for a description of the 
EBS system, Rule 17a-25, and equity cleared reports.
---------------------------------------------------------------------------

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

    As noted above, the type of information relating to orders and 
executions currently collected by the exchanges and FINRA differs 
widely. For example, FINRA's OATS rules and NYSE/NYSE Amex's OTS rules 
(as supplemented by the requirements of NYSE and NYSE Amex Rule 123) 
both set forth in relative detail the information required to be 
recorded by a FINRA, NYSE or NYSE Amex member upon receipt or 
origination of an order; following transmission of an order to another 
FINRA, NYSE or NYSE Amex member; and following modification, 
cancellation or execution of such order.\138\ In contrast, some other

[[Page 32565]]

exchanges' rules only require their members to keep records in 
compliance with the member's recordkeeping obligations under Section 
17(a) of the Exchange Act and rules thereunder,\139\ rather than 
requiring that specific information be captured for orders sent to and 
executed on the exchange.\140\ Although Rule 17a-3 under the Exchange 
Act \141\ requires that a member make and keep detailed information 
with respect to each brokerage order, it does not, for instance, 
require information with respect to the routing of the order, or that 
each order be assigned a unique order identifier.\142\ Similarly, the 
scope of securities covered by existing audit trail rules also differs 
among the exchanges and FINRA. FINRA's OATS rules, for instance, apply 
to orders for equity securities listed on Nasdaq and OTC securities, 
while OTS captures information for orders in NYSE and NYSE Amex-listed 
cash equity securities.\143\
---------------------------------------------------------------------------

    \138\ See FINRA Rules 7400 through 7470, NYSE Rules 123 and 
132B, NYSE Amex Equities Rule 123 and 132B, and supra Sections I.C. 
and I.D. See also CHX Article II, Rule 3; Nasdaq Rules 6950 to 6958; 
and BX Rules 6950 to 6958.
    \139\ 15 U.S.C. 78q(a).
    \140\ See, e.g., NSX Rules 4.1 and 4.2, NYSE Arca Equities Rule 
9.17, and BATS Rule 4.1.
    \141\ 17 CFR 240.17a-3.
    \142\ Rule 17a-3(a)(6)(i) under the Exchange Act requires that a 
member keep a memorandum of each brokerage order given or received 
for the purchase or sale of securities, whether executed or not, 
showing the terms and conditions of the order and any modification 
or cancellation thereof; the account for which it was entered; the 
time the order was received; the time of entry; the execution price; 
the identity of each associated person, if any, responsible for the 
account; the identity of any other person who entered or accepted 
the order on behalf of the customer, or, if a customer entered the 
order on an electronic system, a notation of that entry; and, to the 
extent feasible, the time of execution or cancellation. See 17 CFR 
240.17a-3(a)(6)(i).
    \143\ See supra Sections I.C. and I.D. See also supra the 
discussion in the introduction to Section II relating to the 
Commission's consideration of whether ``retrofitting'' existing SRO 
audit trail rules and systems would achieve the goals of the 
proposed consolidated audit trail.
---------------------------------------------------------------------------

    While there is no current requirement that all SROs record the same 
information for orders and executions in the same or different 
securities, each SRO has a statutory obligation to regulate its market 
and its members. The Commission is concerned that the lack of 
uniformity as to the type of audit trail information gathered by the 
different exchanges and FINRA, and the lack of compatibility in the 
format of each SRO's audit trail data, may hinder the ability of SRO 
and Commission staff to effectively and efficiently monitor for, 
detect, and deter illegal trading that occurs across markets. If a 
market participant is engaging in manipulative behavior across various 
markets, but the rules of one market do not require its members to 
provide detailed information regarding the orders sent to its market, 
it may be difficult for regulators to determine that trading activity 
on one market was related to trading activity on another market. For 
example, Section 9 of the Exchange Act expressly prohibits ``wash 
sales.'' \144\ A trader could attempt to disguise such trading by 
executing various legs of wash transactions on different markets. 
Individual market surveillance based on individual SRO audit trail data 
would not always be able to detect this kind of cross-market abuse.
---------------------------------------------------------------------------

    \144\ See Section 9(a)(1) of the Exchange Act, 15 U.S.C. 
78i(a)(1). Wash sales are transactions involving no change in 
beneficial ownership. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 
205 n. 25 (1976).
---------------------------------------------------------------------------

    Further, while current order audit trail rules provide a framework 
for capturing order information, the Commission is concerned that 
certain information about orders and executions that would be useful to 
efficient and effective regulation of inter-market trading activity and 
prevention of manipulative practices is not captured by existing audit 
trails. Most importantly, the existing audit trails do not require 
members to provide information identifying the customer submitting an 
order, the person with investment discretion for the order, or the 
beneficial owner. The identity of this ``ultimate customer,'' however, 
often is necessary to tie together potential manipulative activity that 
occurs across markets and through multiple accounts at various broker-
dealers. While the Commission notes that exchange and FINRA regulatory 
staff, as well as Commission staff, eventually can obtain identifying 
customer or beneficial account information by submitting requests for 
information through ISG or to various broker-dealers involved in 
potentially wrongful activities, this process can result in significant 
delays in investigating market anomalies or potentially manipulative 
behavior. The Commission preliminarily believes that gaps such as this 
in required audit trail information may hinder the ability of 
regulatory authorities to enforce compliance with SRO rules and the 
federal securities laws, rules, and regulations in a timely manner.
    In addition, an exchange's audit trail information effectively ends 
when an order is routed to another exchange. For example, although the 
NYSE's OTS rule requires a NYSE member or member organization to record 
the fact that an order was transmitted to a non-member, the rules do 
not require the recording of what subsequently happens to the 
order.\145\ Likewise, FINRA's OATS data collection effectively ends if 
an order is routed from a member of FINRA to an exchange.\146\ As a 
result, key pieces of information about the life of an order may not be 
captured, or easily tracked, if an order is routed from one exchange to 
another, or from one broker-dealer to an exchange. For example, the 
name, or identifier, of a broker-dealer that initially received an 
order may be captured by the audit trail of the exchange of which that 
broker-dealer is a member when the broker-dealer sends the order to the 
exchange. However, if the order is routed to and executed on a second 
exchange, the identifying information for that initial broker-dealer 
may not be captured by the second exchange's audit trail requirements.
---------------------------------------------------------------------------

    \145\ See NYSE Rule 132B(c)(3).
    \146\ See FINRA Rule 7440(c)(6). The Commission understands that 
FINRA is able to link OATS order information to Nasdaq order and 
execution data.
---------------------------------------------------------------------------

    Similarly, under current audit trail rules, an incoming order may 
be assigned an order identifier by the initial receiving exchange; 
however, if the order is routed to a second exchange, there is no 
requirement that this order identifier be passed along to or maintained 
by the second exchange. Thus, one order that is routed across markets 
can have multiple order identifiers, each unique to one exchange. The 
Commission preliminarily believes that, from a regulatory standpoint, 
the lack of standardized cross-market order identifiers can pose 
significant obstacles and delays in effectively detecting and deterring 
manipulative behavior because SRO and Commission staff cannot readily 
collect the necessary data (that is, they cannot readily piece together 
activity related to the same order or the same customer occurring 
across several markets) to determine whether violative behavior has 
occurred.
    Additionally, the Commission is concerned that the data generated 
by the EBS system or that is available through the equity cleared 
reports also lacks items of information needed to match up order and 
trade information across markets to fully understand a particular 
trading pattern or to reconstruct a certain type of trading activity. 
EBS data does not include the time of execution, and often does not 
include the identity of the beneficial owner.\147\ The equity cleared 
data also lacks the time of

[[Page 32566]]

execution, as well as time of order receipt, often the identity of the 
beneficial owner, the identity of the broker-dealer(s) that received 
and/or executed the order (if different from the clearing broker-
dealer), and short sale borrow and fails information. In order to 
obtain the time an order was received or the identity of the beneficial 
owner, therefore, SRO or Commission staff may take the additional step 
of submitting an electronically generated blue sheet request to the 
clearing broker-dealer identified in the equity cleared report to ask 
that broker-dealer to identify the beneficial ownership of the 
account(s) effecting the relevant transactions and/or the introducing 
broker,\148\ and this may take a few steps if the clearing broker-
dealer does not know the introducing broker, but only the executing 
broker (if different). If the beneficial ownership of the account(s) 
was not specified in the clearing broker-dealer's response, the staff 
could then ask the introducing broker-dealer for the time an order was 
received and the beneficial account holder information. Often, 
additional steps are required to identify the beneficial account 
holder, such as when the ``customer'' is an omnibus account. 
Furthermore, the equity cleared data could be duplicative. For example, 
one side of a trade can appear multiple times in the equity cleared 
reports because it may be reported by a specialist, a clearing broker-
dealer, and the broker-dealer holding the customer's allocation account 
and the customer's trading account.
---------------------------------------------------------------------------

    \147\ If a customer has an account directly with a clearing 
firm, or if an introducing firm clears its customers' transactions 
on a fully disclosed basis with the clearing firm, the clearing firm 
should be able to identify the beneficial owner of the account on 
its EBS response.
    \148\ For purposes of this discussion, introducing broker means 
the broker-dealer that received or originated the order, and that is 
not also the clearing broker.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \149\ Rule 17a-25 (as well as the SRO EBS rules) does not 
specify a definitive deadline by which such information must be 
furnished to the Commission and, in the Commission's experience, 
data collected through the EBS system often is subject to lengthy 
delays, particularly with respect to files involving a large number 
of transactions over an extended period of time.
---------------------------------------------------------------------------

    The Commission is concerned that inadequacies in the current audit 
trail rules, EBS system, and equity cleared reports also impede the 
ability of SRO or Commission staff to promptly analyze trading 
patterns, particularly to prepare market reconstructions. For example, 
if Commission staff wants to undertake an analysis of an extreme market 
movement over a limited period of time, Commission staff would need to 
analyze audit trail information and EBS submissions of trading data to 
determine if specific trading strategies, techniques or participants 
appeared to be associated with the movement. Because of difficulties in 
linking trades in the audit trails with aggregate day-end trading data 
in EBS submissions, conducting this analysis is difficult and time-
consuming. While the audit trail data could identify the precise 
execution times of trades by particular clearing broker-dealers, it 
would not identify the specific customers or beneficial owners involved 
in the trades. On the other hand, while EBS submissions provide summary 
trading information for particular accounts at the clearing broker-
dealers, they lack execution times for these trades. Further 
complications can arise due to the common practice for large traders to 
route their orders through multiple accounts at multiple clearing 
firms, as well as practices at some firms that use ``average price 
accounts'' to effect trades that are eventually settled in multiple 
proprietary and/or customer accounts. While these practices are not, in 
themselves, improper, their use makes it more challenging to establish 
with certainty when trading on behalf of a particular trader was 
effected during the trading session.
    The Commission preliminarily believes that the proposed 
consolidated audit trail would help alleviate the difficulties faced by 
Commission staff in performing market reconstructions, such as those 
described in the above example, by requiring that national securities 
exchanges, national securities associations, and their members provide 
order and execution data to one central location, largely on a real 
time basis, in a uniform electronic format. Having this information 
readily available in a central location would reduce the need for staff 
to request and collect such information from multiple broker-dealers 
and then examine, analyze and reconcile the disparate information 
provided to accurately ``reconstruct'' the market.\150\
---------------------------------------------------------------------------

    \150\ As discussed, the Commission preliminarily believes that 
the proposal would improve the ability of regulators to conduct 
timely and accurate trading analyses for market reconstructions and 
complex investigations, as well as inspections and examinations. 
Indeed, the Commission believes that the proposed consolidated audit 
trail, if implemented, would have significantly enhanced the 
Commission's ability to quickly reconstruct and analyze the severe 
market disruption that occurred on May 6, 2010. If approved and 
implemented, the proposal also would enhance the Commission's 
ability to similarly respond to future severe market events.
---------------------------------------------------------------------------

B. Books and Records Requirements

    Because brokers-dealers often are members of several exchanges and 
FINRA, they are subject to and must comply with the differing audit 
trail rules. Brokers and dealers also have a statutory obligation to 
maintain records in compliance with Commission and SRO rules.\151\ As a 
result of the differing audit trail rules, brokers and dealers may be 
required to keep records to comply with each audit trail rule relating 
to trading in a certain security. Thus, some broker-dealers may now

[[Page 32567]]

face significant costs to comply with varying audit trail rules.\152\
---------------------------------------------------------------------------

    \151\ See Section 17(a)(1) of the Exchange Act, 15 U.S.C. 
78q(a)(1), and Rules 17a-3 and 17a-4 under the Exchange Act, 17 CFR 
240.17a-3 and 17a-4.
    \152\ See Goldman Sachs and Spear, Leeds & Kellogg Comment 
Letter, supra note 99, at 3, and SIA Comment Letter, supra note 99, 
at 3 (each commenting on the Nasdaq Petition and Intermarket Trading 
Concept Release).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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

D. Access to Audit Trail Information

    While each SRO has direct access to audit trail information 
received from its members, as well as its own data relating to orders 
received and executed on its market, one SRO cannot directly or easily 
access the audit trail information collected by other SROs, despite the 
interconnectedness of today's securities markets and the fact that 
orders are often routed from one marketplace to another marketplace for 
execution. In addition, Commission staff itself does not have immediate 
access to the exchanges' and FINRA's audit trail information, and 
instead must specifically request that an exchange or FINRA produce its 
audit trail information.\154\
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    \154\ The different data fields and unique formats of each SRO 
audit trail present difficulties for Commission examinations and 
investigations, where time constraints can make it impractical to 
manually consolidate diverse data sets.
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    The Commission notes that ISG provides a framework for the 
voluntary sharing of information and coordination of regulatory efforts 
among the exchanges and FINRA to address potential intermarket 
manipulations and trading abuses. The Commission believes that ISG 
plays an important role in information sharing among markets that trade 
the same securities, as well as related securities or futures on the 
same products.\155\ However, the information provided to ISG, which is 
drawn from each individual exchange's audit trail and books and 
records, is not in any uniform or comparable format. In addition, 
information is only submitted to ISG upon a request by one of its 
members, and the information is not provided by ISG members in real 
time. Further, the operation of ISG is not subject to the Commission's 
oversight, including approval of what, and how, information is 
collected from and shared across SROs. The Commission preliminarily 
believes that it is now appropriate to mandate a structure whereby the 
regulatory staff of all exchanges and FINRA, as well as the Commission, 
can directly access comprehensive uniform cross-market order and 
execution information in real time pursuant to Commission rule, rather 
than through an information-sharing cooperative governed only by 
contract.
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    \155\ See supra note 96.
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E. Scalability of the EBS System and Rule 17a-25

    Although the EBS system and Rule 17a-25 can be used to obtain 
information in conjunction with the SRO audit trail information, the 
Commission is concerned with the ability of the EBS system, as enhanced 
by Rule 17a-25, to keep pace with changes in the securities markets 
over recent years. Various changes in market dynamics have affected the 
utility of the EBS system and Rule 17a-25. For example, decimal trading 
has increased the number of price points for securities, and the volume 
of quotations and orders has correspondingly dramatically increased. 
Thus, the volume of transaction data subject to reporting under the EBS 
system can be significantly greater than the EBS system was intended to 
accommodate in a typical request for data. As a request-based system 
that is most useful when targeting trading in a specific security for a 
specific time, the EBS system is not well-suited as a broad-based tool 
to detect illegal or manipulative activity. The increased use of 
sponsored access (or other indirect access to an exchange) also has 
made it more difficult to use the EBS system and Rule 17a-25 to 
identify the ultimate customer that originates an order because the 
member broker-dealer through whom an order is sent to an exchange may 
not know the identity of the underlying customer.\156\
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    \156\ Indirect access is when a non-member of an exchange 
accesses an exchange through a member. For example, to comply with 
regulatory obligations such as Rule 611 of Regulation NMS (17 CFR 
242.611), exchanges increasingly rely on indirect access to other 
exchanges through member broker-dealers of the other exchanges, so 
called ``private linkage'' access. Sponsored access is one type of 
indirect access and is governed by exchange rules. See, e.g., Nasdaq 
Rule 4611(d). The Commission recently proposed rules that would 
address sponsored access to exchanges. See Securities Exchange Act 
Release No. 61379 (January 26, 2010), 75 FR 4713 (January 29, 2010).
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    In addition, the increasing number of alternative trading venues 
creates more opportunities for orders to be routed to other markets and 
thus can result in delays in producing EBS data as requests must be 
made to several broker-dealers in the ``chain'' of an order. Finally, 
the increased trading of derivative instruments and products also has 
affected the ongoing effectiveness of the EBS system and Rule 17a-25. A 
market participant can use derivative instruments and products as a 
substitute for trading in a particular equity, and likewise engage in 
illegal trading activity in derivative instruments and products. 
However, because information related to some derivative instruments 
over which the Commission has anti-fraud authority (such as security-
based swaps) is not included within the EBS data or provided pursuant 
to Rule 17a-25, the EBS system and Rule 17a-25 are not effective tools 
for ascertaining activity in those markets or how that activity may be 
affecting the underlying equity market.\157\
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    \157\ See infra Section III.A for a discussion of the scope of 
products to be covered by the proposed Rule and the intent to expand 
the scope to cover other products and transactions.
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    In the Commission staff's experience, the EBS is most effective 
when investigating or analyzing trading in a small sample of securities 
over a limited period of time. But even under those circumstances, 
Commission staff often must make multiple requests to broker-dealers to 
obtain sufficient order information about the purchase or sale of a 
specific security to be able to adequately analyze the suspect trading. 
These multiple requests and responses can take a significant amount of 
time. The Commission preliminarily believes that the EBS system may no 
longer be able to fully support the regulatory

[[Page 32568]]

challenges currently facing SRO and Commission regulatory staff.
    The consolidated audit trail that the Commission is proposing today 
would provide significant improvements in the order and execution 
information available to SRO and Commission staff in several discrete 
ways. Among other things, the proposed audit trail would require that 
national securities exchanges and national securities associations and 
their members submit uniform order and execution information to a 
central repository on a real time basis, where possible. National 
securities exchanges and associations, and their member firms, would be 
required to identify the person with investment discretion for the 
order, and beneficial account holder, if different, along with other 
key information about the customer or proprietary desk that placed or 
originated the order. The proposed consolidated audit trail also would 
cover any action taken with respect to the order through execution, or 
cancellation, as applicable, and thus would allow regulators to more 
easily trace the order from inception to cancellation or 
execution.\158\
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    \158\ The proposed Rule also would require the reporting of 
certain post-trade information. See infra Section III.D.2.
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    The Commission preliminarily believes that the proposed audit trail 
information would greatly enhance the ability of SRO staff to 
effectively monitor and surveil the securities markets on a real time 
basis, and thus to detect and investigate illegal activity in a more 
timely fashion, whether on one market or across markets. The Commission 
also preliminarily believes that the proposal would improve the ability 
of Commission and SRO staff to conduct more timely and accurate trading 
analysis, as well as to conduct more timely and accurate market 
reconstructions, complex enforcement inquiries or investigations, and 
inspections and examinations of regulated entities and SROs.

III. Description of Proposed Rule

    To help address the deficiencies described above, the Commission is 
proposing to adopt a rule that would require national securities 
exchanges \159\ and national securities associations \160\ to create 
and implement a consolidated audit trail that captures customer and 
order event information, in real time, for all orders in NMS 
securities, across all markets, from the time of order inception 
through routing, cancellation, modification, or execution.
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    \159\ National securities exchange is defined in Rule 600(a)(45) 
of Regulation NMS as any exchange registered pursuant to Section 6 
of the Exchange Act (15 U.S.C. 78f). 17 CFR 242.600(a)(45).
    \160\ National securities association is defined in Rule 
600(a)(44) of Regulation NMS as any association of brokers and 
dealers registered pursuant to Section 15A of the Exchange Act (15 
U.S.C. 78o-3). 17 CFR 242.600(a)(44). As noted above, see supra note 
12, FINRA currently is the only national securities association to 
which the proposal would apply, as the NFA is restricted to 
regulating its members who are registered as broker-dealers in 
security futures products due to its limited purpose registration 
with the Commission under Section 15A(k) of the Exchange Act, 15 
U.S.C. 78o-3(k). The NFA could, of course, seek to expand its 
current registration. Thus, for ease of reference, this proposal 
refers to FINRA but the proposed requirements would apply to any 
national securities association registered with the Commission.
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    If adopted, the proposed Rule would require each national 
securities exchange and national securities association to file jointly 
with the Commission on or before 90 days from approval of this proposed 
Rule an NMS plan to govern the creation, implementation, and 
maintenance of a consolidated audit trail and a central 
repository.\161\ The NMS plan would be required to be filed with the 
Commission pursuant to, and subject to the requirements of, Rule 608 of 
Regulation NMS.\162\ As such, the proposed NMS plan would be published 
in the Federal Register and subject to public notice and comment in 
accordance with Rule 608(b). Further, the NMS plan filed pursuant to 
the proposed Rule, or any amendment to such a plan, would not become 
effective unless approved by the Commission or otherwise permitted in 
accordance with Rule 608.\163\
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    \161\ See infra Section III.F. for a discussion of the central 
repository. The proposed Rule would explicitly require each national 
securities exchange and national securities association to be a 
sponsor of the NMS plan submitted pursuant to the Rule and approved 
by the Commission. See proposed Rule 613(a)(4).
    \162\ 17 CFR 242.608. See proposed Rule 613(a)(2).
    \163\ See proposed Rule 613(a)(5) and 17 CFR 242.608.
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    The Commission would expect the exchanges and FINRA to cooperate 
with each other and to take joint action as necessary to develop, file, 
and ultimately implement a single NMS plan to fulfill this requirement. 
The Commission requests comment on this approach. Specifically, the 
Commission requests comment on whether requiring the exchanges and 
associations to act jointly by filing an NMS plan that would contain 
the requirements for a consolidated audit trail is the most effective 
and efficient way to achieve the objectives of a consolidated audit 
trail. Or, should the Commission require the exchanges and associations 
to standardize or otherwise enhance their existing rules? What approach 
would be most efficient in improving the ability to monitor cross-
market trading, or undertake market analysis or reconstructions, and 
why?
    As discussed in further detail below, the proposed Rule would 
require that the NMS plan include provisions regarding: (1) The 
operation and administration of the NMS plan; (2) the creation and 
oversight of a central repository; (3) the data required to be provided 
by SROs and their members to the central repository; (4) clock 
synchronization; (5) compliance by national securities exchanges, 
FINRA, and their members with the proposed Rule and the NMS plan; and 
(6) the possible expansion of the NMS plan to products other than NMS 
securities.
    The proposed Rule is designed to allow the national securities 
exchanges and national securities associations to develop the details 
of the NMS plan that they believe should govern the creation, 
implementation and maintenance of the central repository and 
consolidated audit trail, within the parameters set forth in the 
proposed Rule. The Commission believes that the national securities 
exchanges and national securities associations working jointly are in 
the best position to propose for themselves and their members the 
specifics of how the consolidated audit trail should be structured and 
administered. To this end, the proposed Rule contains a broad framework 
within which the exchanges and associations would provide the details 
that they believe would result in a functional, cooperative mechanism 
to create and maintain a consolidated audit trail, as well as certain 
explicit requirements the NMS plan must meet. As noted above, the 
proposed NMS plan developed by the exchanges and FINRA would be subject 
to public comment and approval by the Commission.

A. Products and Transactions Covered

    Proposed Rule 613 would apply to secondary market transactions in 
all NMS securities, which means NMS stocks and listed options.\164\ The 
Commission ultimately intends for the consolidated audit trail to cover

[[Page 32569]]

secondary market transactions in other securities, including equity 
securities \165\ that are not NMS securities, corporate bonds, 
municipal bonds, and asset-backed securities and other debt 
instruments; \166\ credit default swaps, equity swaps, and other 
security-based swaps; and any other products that may come under the 
Commission's jurisdiction in the future. Further, the Commission 
preliminarily believes that it would be beneficial to provide for the 
possible expansion of the consolidated audit trail to include 
information on primary market transactions in NMS stocks and other 
equity securities that are not NMS stocks, as well as primary market 
transactions in debt securities.\167\ Such information could be used to 
monitor for violations of certain rules under the Exchange Act, such as 
Regulation M and Rule 10b-5 under the Exchange Act.\168\ Further, 
FINRA's transaction reporting requirements for debt securities already 
cover primary market transactions in debt securities,\169\ and thus 
FINRA members should already be recording information relating to such 
transactions that could be included in an audit trail. The Commission 
proposes that the scope of the Rule initially be limited to secondary 
market transactions in NMS securities, however, to allow for a 
manageable implementation of the proposed consolidated audit trail, and 
because market participants already have experience with audit trails 
for these types of transactions in these securities.
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    \164\ NMS security is defined in Rule 600(a)(46) of Regulation 
NMS to mean any security or class of securities for which 
transaction reports are collected, processed, and made available 
pursuant to an effective transaction reporting plan, or an effective 
national market system plan for reporting transactions in listed 
options. 17 CFR 242.600(a)(46). NMS stock is defined in Rule 600(47) 
to mean any NMS security other than an option. 17 CFR 
242.600(a)(46). A listed option is defined in Rule 600(a)(35) of 
Regulation NMS to mean any option traded on a registered national 
securities exchange or automated facility of a national securities 
association. 17 CFR 242.600(a)(35).
    \165\ Equity security is defined in Section 3(a)(11) of the 
Exchange Act to include any stock or similar security; or any 
security future on any such security; or any security convertible, 
with or without consideration, into such a security, or carrying any 
warrant or right to subscribe to or purchase such a security; or any 
such warrant or right; or any other security which the Commission 
shall deem to be of similar nature and consider necessary or 
appropriate, by such rules and regulations as it may prescribe in 
the public interest or for the protection of investors, to treat as 
an equity security. See 15 U.S.C. 78c(a)(11).
    Rule 3a11-1 under the Exchange Act defines equity security to 
include any stock or similar security, certificate of interest or 
participation in any profit sharing agreement, preorganization 
certificate or subscription, transferable share, voting trust 
certificate or certificate of deposit for an equity security, 
limited partnership interest, interest in a joint venture, or 
certificate of interest in a business trust; any security future on 
any such security; or any security convertible, with or without 
consideration into such a security, or carrying any warrant or right 
to subscribe to or purchase such a security; or any such warrant or 
right; or any put, call, straddle, or other option or privilege of 
buying such a security from or selling such a security to another 
without being bound to do so. See 17 CFR 240.3a11-1.
    \166\ Asset-backed security means a security that is primarily 
serviced by the cash flows of a discrete pool of receivables or 
other financial assets, either fixed or revolving, that by their 
terms convert into cash within a finite time period, plus any rights 
or other assets designed to assure the servicing or timely 
distributions of proceeds to the security holders; provided that in 
the case of financial assets that are leases, those assets may 
convert to cash partially by the cash proceeds from the disposition 
of the physical property underlying such leases. See 17 CFR 
229.1101(c)(1).
    \167\ A primary market transaction is any transaction other than 
a secondary market transaction and refers to any transaction where a 
person purchases securities in an offering. See, e.g., FINRA Rule 
6710 (defining two types of primary market transactions for TRACE-
eligible securities, a List or Fixed Offering Price Transaction or a 
Takedown Transaction).
    \168\ See 17 CFR 242.100 et. seq. and 17 CFR 240.10b-5. Rule 105 
prohibits the short selling of equity securities that are the 
subject of a public offering for cash and the subsequent purchase of 
the offered securities from an underwriter or broker or dealer 
participating in the offering if the short sale was effected during 
a period that is the shorter of the following: (i) Beginning five 
business days before the pricing of the offered securities and 
ending with such pricing; or (ii) beginning with the initial filing 
of such registration statement or notification on Form 1-A or Form 
1-E and ending with the pricing. Thus, Rule 105 prohibits any person 
from selling short an equity security immediately prior to an 
offering and purchasing the security by participating in the 
offering. The primary market transaction data would allow for the 
ability to more quickly identify whether any participant in the 
offering sold short prior to the offering.
    Rule 10b-5 prohibits any act or omission resulting in fraud or 
deceit in connection with the purchase or sale of any security. The 
primary market transaction data for bonds would allow for 
identification of the cost basis for bond purchases by 
intermediaries and make it easier to assess whether subsequent mark-
ups to retail investors in primary offerings are fair and reasonable 
and, if not, whether there has been a violation of the antifraud 
provisions of the federal securities laws.
    \169\ See FINRA Rule 6730(a)(5).
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    As discussed above, the Commission believes that implementing a 
consolidated audit trail for NMS securities would aid the SROs in more 
effectively and efficiently carrying out their regulatory 
responsibilities. It would also assist the Commission in carrying out 
its statutory responsibilities. The Commission further preliminarily 
believes that a timely expansion of the scope of the consolidated audit 
trail beyond NMS securities would be beneficial, as illegal trading 
strategies that the consolidated audit trail would be designed to help 
detect and deter, such as insider trading, may involve trading in 
multiple related products other than NMS securities across multiple 
markets.
    For example, the Commission routinely receives information relating 
to possible upward manipulation of security prices in violation of 
Sections 9(a) and 10(b) of the Exchange Act,\170\ and alleged abusive 
short selling in the over-the-counter market, which includes FINRA's 
Bulletin Board and Pink Sheets. If the consolidated audit trail were 
expanded to cover these securities, it would be possible for SROs and 
the Commission to make comparisons between current and historical data 
in a more timely manner than is currently possible, to more quickly 
determine whether or not a complaint merits additional attention and 
the corresponding commitment of enforcement resources. Similarly, to 
the extent that instruments currently not considered NMS securities can 
be substitutes for long or short positions in NMS securities, having 
access to an audit trail that documents trading activity in such 
securities would improve the Commission's ability to make a risk 
assessment as to information it has received about possibly 
manipulative activity.\171\ Having ready access to this information in 
an audit trail also would improve the Commission's inspection process 
because it would enhance risk assessment and allow for better selection 
as to which broker-dealers to examine. For example, the information 
would allow for better trend analysis and outlier identification. It 
also would improve pre-examination work and the asset verification 
process,\172\ and focus document requests, making the examination 
process more efficient for the Commission staff and the registrants 
subject to the process.
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    \170\ 15 U.S.C. 78i(a) and 78j(b).
    \171\ The Commission's Division of Enforcement has recently 
established an Office of Market Intelligence. This Office, among 
other things, conducts intake and triage of investor and industry 
referrals that are received by the Commission each year. Currently, 
a thorough review of referrals requires extensive resource 
allocation as the primary source for evaluating trading data in the 
EBS system. Expansion of the consolidated audit trail to non-NMS 
securities would allow that Office to evaluate the merits of each 
referral faster and more effectively, and more efficiently allocate 
enforcement resources to appropriate cases.
    \172\ Asset verification is an exam process that attempts to 
locate independent information to verify certain customer positions, 
transactions, and balances at broker-dealers.
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    To help ensure that such an expansion would occur in a reasonable 
time and that the systems and technology that would be used to 
implement the Rule as proposed are designed to be easily scalable, 
proposed Rule 613(i) would require that the NMS plan contain a 
provision requiring each national securities exchange and national 
securities association that is a sponsor of the plan \173\ to jointly 
provide the Commission a document outlining how the sponsors could 
incorporate into the consolidated audit trail information with respect 
to: (1) Equity securities that

[[Page 32570]]

are not NMS securities; (2) debt securities, including asset-backed 
securities; and (3) primary market transactions in NMS stocks, equity 
securities that are not NMS securities, and debt securities. The 
sponsors specifically would be required to address, among other things, 
details for each order and reportable event that they would recommend 
requiring to be provided; which market participants would be required 
to provide the data; an implementation timeline; and a cost estimate.
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    \173\ Sponsor, when used with respect to an NMS plan, is defined 
in Rule 600(a)(70) of Regulation NMS to mean any self-regulatory 
organization which is a signatory to such plan and has agreed to act 
in accordance with the terms of the plan. See 17 CFR 242.600(a)(70).
---------------------------------------------------------------------------

    The Commission requests comment on the proposed scope of products 
to be covered by the consolidated audit trail. Should the consolidated 
audit trail initially cover securities other than NMS securities? Why 
or why not? The Commission also requests comment on whether the 
approach to expand the consolidated audit trail to include the products 
and transactions specified above represents an appropriate expansion of 
the consolidated audit trail, and what additional capital commitment 
would be required by the various market participants to implement such 
an expansion. Please be specific in your response with respect to 
different products or transactions (e.g. security-based swaps, or 
primary market transactions in NMS stocks). Are there other securities 
or products that should be identified and included in a future 
expansion? What would be the challenges to any expansion to the 
products and transactions listed above? Are there any other actions 
that the Commission or SROs would need to take to be able to expand the 
audit trail to certain products or transactions? Should the Commission 
consider expansion to certain products or transactions before others? 
The Commission also requests comment on an appropriate and realistic 
time frame for including these other products and transactions in the 
consolidated audit trail and whether an expansion should be done in 
phases.
    The Commission also requests comment on whether implementation of 
the proposed Rule, which would apply to NMS securities, would have an 
impact on trading activity by market participants in products not 
initially covered by the proposed Rule. The proposed consolidated audit 
trail is designed to provide the SROs and the Commission a tool to more 
effectively, and in a more timely manner, identify potential 
manipulative or other illegal activity. More timely detection and 
investigation of such activity may lead to greater deterrence of future 
illegal activity if potential wrongdoers perceive a greater chance of 
regulators identifying their activity in a more timely fashion. Do 
commenters believe that the existence of the proposed audit trail would 
alter market participants' trading behavior, such as by shifting their 
trading to products or markets not covered by the proposed Rule to 
avoid detection of illegal activity using consolidated audit trail 
data? Would the proposal impact a market participant's analysis of the 
potential risks and benefits of manipulative activity involving NMS 
securities? If so, how so? In addition, to the extent commenters 
believe that market participants may alter their trading behavior, such 
as by shifting trading to products that are not initially covered by 
the proposed Rule to avoid detection of manipulative activity, the 
Commission requests comment on the importance of expanding the 
consolidated audit trail to cover additional products.

B. Orders and Quotations

    The proposed Rule would require that information be provided to the 
central repository for every order in an NMS security originated or 
received by a member of an exchange or FINRA. The proposed Rule would 
define ``order'' to mean: (1) Any order received by a member of a 
national securities exchange or national securities association from 
any person; (2) any order originated by a member of a national 
securities exchange or national securities association; or (3) any bid 
or offer.\174\ Thus, the proposed consolidated audit trail would cover 
all orders (whether for a customer or for a member's own account) as 
well as quotations in NMS stocks and listed options.\175\ Each member 
would be required to report to the central repository the origination 
of its own orders or quotations, and the SRO to which the member sends 
its orders and quotations would be required to report receipt and 
execution, if applicable, of those orders and quotations. Because the 
origination of the quotations would already be reported to the central 
repository by the member, an SRO would not be required to separately 
submit to the central repository its best bids and offers that it is 
required to submit to the central processors.\176\
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    \174\ See proposed Rule 613(j)(4). Bid or offer is defined in 
Rule 600(a)(8) of Regulation NMS to mean the bid price or the offer 
price communicated by a member of a national securities exchange or 
member of a national securities association to any broker or dealer, 
or to any customer, at which it is willing to buy or sell one or 
more round lots of an NMS security, as either principal or agent, 
but shall not include indications of interest. 17 CFR 242.600(a)(8).
    \175\ Quotation is defined in Rule 600(a)(62) of Regulation NMS 
to mean a bid or an offer. 17 CFR 242.600(a)(62).
    \176\ See Rule 601 of Regulation NMS, 17 CFR 242.601.
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    The Commission preliminarily believes that the inclusion of orders 
for a member's own account (``proprietary orders'') and their bids and 
offers in the scope of the consolidated audit trail is necessary and 
appropriate to effectively and efficiently carry out the stated 
objectives of the consolidated audit trail. The SROs would not be able 
to use the consolidated audit trail data to surveil trading by broker-
dealers through their proprietary accounts if that information is not 
included in the audit trail. Further, including proprietary orders and 
quotations in the consolidated audit trail would permit SROs to harness 
the intended benefits of the consolidated audit trail to more 
efficiently monitor for violations of SRO rules where the exact 
sequence of the receipt and execution of customers orders in relation 
to the creation and execution of proprietary orders or quotations is 
important to determine whether or not a violation occurred. For 
example, SROs would be able to use the consolidated audit trail data to 
more efficiently monitor for instances where a broker-dealer receives a 
customer order, then sends a proprietary order to one exchange or 
updates its quotations on an exchange prior to sending the customer 
order to another exchange, in possible violation of the trading ahead 
prohibitions in their rules.\177\
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    \177\ See, e.g., FINRA Rule 5320 and NYSE Arca Equities Rule 
6.16.
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    Another example where information on proprietary orders or 
quotations would be useful to have included in the consolidated audit 
trail is in the investigation of a possible ``spoofing'' allegation. In 
those cases, a market participant enters and may immediately cancel 
limit orders or quotations in a specific security with the intent of 
having those non-bona fide orders or quotations change the national 
best bid and national best offer (``NBBO''). Because a market 
participant could conduct this activity across multiple markets, using 
different accounts, the lack of consolidated data makes it much more 
difficult to identify the source of the orders or quotations and thus 
to determine whether the quoted price was manipulated or simply 
responding to market forces. The Commission therefore preliminarily 
believes that having information on proprietary orders and quotations 
in the consolidated audit trail along with customer order information 
would

[[Page 32571]]

greatly enhance the ability of the SROs to detect potentially violative 
activity.
    The Commission requests comment on its proposed definition of 
``order'' and the scope of the proposed consolidated audit trail. 
Specifically, the definition would include orders received and 
originated by SRO members, as well as quotations originated by SRO 
members. Should it include quotations? Why or why not? Are there any 
differences between orders and quotations that should be taken into 
account with respect to the information that would be required to be 
provided to the central repository with respect to each bid or offer, 
or with respect to how, or which entity, should be required to report 
quotation information to the central repository? For example, the 
Commission understands that out-of-the-money options generate a high 
volume of automated quotation updates to reflect changes in the price 
of the underlying security, yet these series often have very little 
trading activity. Should this type of quotation be required to be 
submitted to the central repository? If not, is there any way to 
distinguish these quotations from other quotations that commenters 
believe should be reported, such as quotations generated by a profit-
seeking algorithm? What is the magnitude of quotation data compared to 
order data and trade data, for both NMS stocks and listed options? 
Please provide any empirical data. Would there be a significant cost 
savings to the submission and collection of certain quotation 
information (for example, quotations in listed options) by end-of-day 
instead of in real time? If so, please quantify.
    The Commission also requests comment with respect to including 
proprietary orders as well as customer orders in the scope of the 
consolidated audit trail. Specifically, are there any differences 
between customer orders and proprietary orders that should be taken 
into account with respect to the information that would be required to 
be provided to the central repository with respect to proprietary 
orders? The Commission also requests comment on how, if at all, the 
consolidated audit trail should take into account instances where an 
SRO's quotations (which can include orders received from members as 
well as quotations) are not actionable, such as when an exchange has a 
systems failure. Should non-firm quotations be marked in the 
consolidated audit trail to show they are not firm? If so, how would 
that be accomplished where it is the exchange making the determination 
its quotations are not firm, not the member that submitted the order or 
quotation?

C. Persons Required To Provide Information to the Central Repository

    Proposed Rule 613 would require, through the mechanism of an NMS 
plan and exchange and association rules adopted pursuant to an NMS 
plan, national securities exchanges, national securities associations, 
and their respective members \178\ to provide certain information 
regarding each order and each reportable event \179\ to the central 
repository.\180\ The Commission notes that requiring all members to 
provide certain information would capture alternative trading systems 
(``ATSs'').\181\
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    \178\ A member of a national securities exchange is defined in 
Section 3(a)(3)(A) of the Exchange Act to mean: (1) Any natural 
person permitted to effect transactions on the floor of the exchange 
without the services of another person acting as broker; (2) any 
registered broker or dealer with which such a natural person is 
associated; (3) any registered broker or dealer permitted to 
designate as a representative such a natural person; and (4) any 
other registered broker or dealer which agrees to be regulated by 
such exchange and with respect to which the exchange undertakes to 
enforce compliance with the provisions of the Exchange Act, the 
rules and regulations thereunder, and its own rules. Further, for 
purposes of Sections 6(b)(1), 6(b)(4), 6(b)(6), 6(b)(7), 6(d), 
17(d), 19(d), 19(e), 19(g), 19(h), and 21 of the Exchange Act, the 
term ``member'' when used with respect to a national securities 
exchange also means, to the extent of the rules of the exchange 
specified by the Commission, any person required by the Commission 
to comply with such rules pursuant to Section 6(f) of this title. 
See 15 U.S.C. 78c(a)(3)(A).
    A member of a registered securities association is defined in 
Section 3(a)(3)(B) of the Exchange Act to mean any broker or dealer 
who agrees to be regulated by such association and with respect to 
whom the association undertakes to enforce compliance with the 
provisions of the Exchange Act, the rules and regulations 
thereunder, and its own rules. See Section 3(a)(3)(B) of the 
Exchange Act, 15 U.S.C. 78c(a)(3)(B). Section 15(b)(8) of the 
Exchange Act, 15 U.S.C. 78o(b)(8), states that it shall be unlawful 
for any registered broker or dealer to effect any transaction in, or 
induce or attempt to induce the purchase or sale of, any security 
(other than commercial paper, bankers' acceptances, or commercial 
bills), unless such broker or dealer is a member of a securities 
association registered pursuant to Section 15A of the Exchange Act 
or effects transactions in securities solely on a national 
securities exchange of which it is a member.
    Rule 15b9-1(a) under the Exchange Act, 17 CFR 240.15b9-1(a), 
generally states that any broker or dealer required by Section 
15(b)(8) of the Exchange Act to become a member of a registered 
national securities association shall be exempt from such 
requirement if it is a member of a national securities exchange; 
carries no customer accounts; and has annual gross income derived 
from purchases and sales of securities otherwise than on a national 
securities exchange of which it is a member in an amount no greater 
than $1,000.
    \179\ Reportable event would be defined in proposed Rule 
613(j)(5) to include, but not be limited to, the receipt, 
origination, modification, cancellation, routing, and execution (in 
whole or in part) of an order.
    \180\ See infra Section III.D. for a detailed discussion of the 
information that would be required to be provided to the central 
repository, and infra Section III.H.2. for a discussion of the 
requirement that the exchanges and FINRA adopt rules to implement 
the requirements of the NMS plan for their members.
    \181\ An ATS is defined in Rule 300(a) of Regulation ATS. See 17 
CFR 242.300(a). Regulation ATS requires ATSs to be registered as 
broker-dealers with the Commission, which entails becoming a member 
of FINRA and fully complying with the broker-dealer regulatory 
regime. See Concept Release on Equity Market Structure, supra note 
19, at 3599.
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    The Commission's intent is to require any entity acting in a broker 
or dealer capacity that would receive an order from a customer or 
originate an order for its own account to provide information to the 
central repository. The Commission requests comment on whether 
requiring all members of each exchange and association to provide the 
required information would encompass all broker or dealers or other 
persons that would receive or originate orders, as defined in the 
proposed Rule. If not, why not? The Commission requests comment on 
whether it should, in the alternative, require all brokers and dealers 
registered with the Commission to provide such information, rather than 
all members of an exchange or association. Would applying the 
requirements to registered brokers and dealers encompass all persons 
that would be able to receive or originate orders as defined in the 
proposed rule? Are there persons that are not registered as a broker or 
dealer, and that are not a member of an exchange or association, that 
would still receive or originate orders in NMS securities? How should 
the Commission address that situation to promote inclusion of all 
relevant orders and executions in a consolidated audit trail?

D. Provision of Information to the Central Repository

    Proposed Rule 613(c)(1) generally would require the NMS plan to 
provide for an accurate, time-sequenced record of orders beginning with 
the receipt or origination of an order by a member of a national 
securities exchange or national securities association, and further 
documenting the life of the order through the process of routing, 
modification, cancellation, and execution (in whole or in part). To 
effectuate this goal, proposed Rule 613(c)(2) would require the NMS 
plan to require each national securities exchange, national securities 
association, and member of such exchange or association to collect and 
provide to the central repository certain information with respect to 
orders in NMS securities.\182\
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    \182\ See Sections III.D.1. and III.D.2. below for a detailed 
discussion of the information that would be required to be provided 
to the central repository.

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[[Page 32572]]

    Specifically, the proposed Rule would require the NMS plan to 
require each national securities exchange and its members to collect 
and provide to the central repository certain order information for 
each NMS security registered or listed for trading on such exchange or 
admitted to unlisted trading privileges on such exchange.\183\ The 
proposed Rule also would require the NMS plan to require each national 
securities association and its members to collect and provide to the 
central repository certain order information for each NMS security for 
which transaction reports are required to be submitted to the 
association.\184\ The Commission requests comment on whether requiring 
exchanges and their members, and associations and their members, to 
report information for orders for these securities to a central 
repository is appropriate, and whether the requirements, as proposed, 
would cover all NMS securities.\185\
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    \183\ See proposed Rule 613(c)(5).
    \184\ See proposed Rule 613(c)(6).
    \185\ See infra Section III.F. for a discussion of the central 
repository.
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    As discussed below in Section III.D.1., certain of the information 
would be required to be captured and transmitted to the central 
repository on a real time basis, meaning immediately and with no built 
in delay from when the reportable event occurs.\186\ Other information 
would be permitted to be captured and transmitted to the central 
repository promptly after the exchange, association, or member receives 
the information, but in no instance later than midnight of the day that 
the reportable event occurs or the exchange, association, or member 
receives such information.\187\ The data collected by the national 
securities exchanges, national securities associations, and their 
members would be required to be electronically transmitted to the 
central repository in a uniform electronic format.\188\
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    \186\ See proposed Rule 613(c)(3). See supra note 179 for a 
definition of reportable event.
    \187\ See proposed Rule 613(c)(4). This requirement to report no 
later than midnight on the day that the reportable event occurs or 
the exchange, association or member receives the information would 
be determined using the local time of the entity reporting the 
information to the central repository.
    \188\ See proposed Rule 613(c)(2).
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1. Information To Be Provided to the Central Repository in Real Time
    As discussed above in Section II.A.4., the Commission preliminarily 
believes that requiring the submission of consolidated audit trail 
information on a real time basis would help enable more timely cross-
market monitoring or surveillance and investigations of, or other 
responses to, market anomalies. Regulators therefore could more easily 
and quickly identify manipulative or other undesirable activity. Having 
the information available in real time would allow the staff of the 
SROs to run certain cross-market surveillances in real time to 
ascertain whether anomalous trading activity is occurring, and the SROs 
could then more quickly begin an investigation into the suspected 
anomalous trading. Timely pursuit of potential violations can be 
important in seeking to freeze any profits received from illegal 
activity before they are spent or otherwise become unreachable (for 
instance, by being transferred out of the country). The Commission also 
preliminarily believes that requiring the submission of audit trail 
information in real time would enable the Commission to access the 
information on a more timely basis than currently is the case, to 
support its examination and enforcement activities, as well as its 
analysis of market activity.\189\
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    \189\ See supra notes 28, 154, and 171 and accompanying text.
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    The Commission requests comment as to whether it is feasible to 
require the submission of the proposed audit trail information, as 
detailed below, to the central repository on a real time basis. If the 
information is not submitted on a real time basis, when should the 
information be submitted to the central repository? Would real time 
order and execution information be useful for cross-market surveillance 
and investigations of market anomalies? If so, how? If not, why not? 
Please discuss the costs and benefits of recording and transmitting the 
data in real time, or not in real time. For example, how would costs 
differ between submitting end-of-day data compared to real time data? 
Are there categories of information that would be easier to produce on 
a real time basis than others? What types of systems modifications by 
the exchanges, FINRA, and their respective members would be necessary 
to collect and submit the required audit trail information to the 
central repository on a real time basis? Please respond with 
specificity. The Commission further requests comment on whether the 
requirement to report information in real time should be limited to a 
specific time period during the day, such as when the markets for 
trading NMS stocks and listed options are open for trading? Or some 
other time period? How much lower would the cost be to submit data in 
real time during trading hours than during the whole day? Or some other 
time period? Are there practical issues with requiring real time 
reporting throughout the day? Would requiring data to be submitted in 
real time all day, as proposed, allow the ability to perform systems 
maintenance if necessary? If commenters support the requirement to 
report information in real time, do they believe that there are times 
during the day when real time reporting may be unnecessary? Why or why 
not?
    Proposed Rule 613(c)(3) would require the NMS plan to require each 
exchange, association, and member to collect and provide to the central 
repository on a real time basis details for each order and each 
reportable event,\190\ as outlined below. Each exchange, association, 
or member would be required to report the information for each order, 
for each reportable event, only with respect to an action taken by the 
exchange, association, or member. For example, if a member receives an 
order from a customer, the member would be required to report the 
receipt of that order (with the required information) to the central 
repository. If the member then routed that order to an exchange for 
execution, the member would be required to report the routing of that 
order (with the required information) to the central repository. 
Likewise, the exchange would be required to report the receipt of that 
order from the member (with the required information) to the central 
repository. If the exchange executed the order on its trading 
system(s), the exchange would be required to report that execution of 
the order (with the required information) to the central repository, 
but the member would not also be required to report the execution of 
the order to the central repository. If the member executed the order 
in the over-the-counter market, however, rather than routing the order 
to an exchange (or other market center) for execution, the member would 
be required to report the execution of the order to the central 
repository.
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    \190\ See supra note 179 for a definition of reportable event.
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i. Customer Information
    The proposed Rule specifically would require, for the receipt or 
origination of each order, information to be reported to the central 
repository with respect to the customer that generates the order--
specifically, the beneficial owner(s) of the account originating the 
order and the person exercising investment discretion for the account 
originating the order, if different from the beneficial owner.\191\ As 
discussed above in Section

[[Page 32573]]

II.A.1, such information generally is neither required nor captured on 
existing audit trails. While Rule 17a-25 requires broker-dealers to 
electronically submit information about customer and proprietary 
securities trading, such information is required to be submitted to the 
Commission only upon request. The Commission preliminarily believes 
that the usefulness of audit trail information for purposes of 
effective enforcement and cross-market surveillance of trading activity 
would be greatly improved by having the identity of the customer 
electronically attached to the report of the receipt or origination of 
each order that is sent to the central repository.\192\
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    \191\ The proposed Rule would define ``customer'' to mean the 
beneficial owner(s) of the account originating the order and the 
person exercising investment discretion for the account originating 
the order, if different from the beneficial owner(s). See proposed 
Rule 613(j)(1). The Commission notes that this proposed definition 
of customer is only for purposes of proposed Rule 613, and what 
information would be required to be collected and disclosed by 
members to the central repository. The Commission does not intend to 
alter the responsibilities that broker-dealers are already subject 
to pursuant to SRO rules, or the federal securities laws, rules or 
regulations or other laws, with respect to the customers (for 
example, suitability rules, see, e.g. NASD Rule 2310).
    \192\ See supra Section II.A.
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    The proposed Rule would require that the NMS plan require, for the 
receipt or origination of an order, the provision to the central 
repository of information of sufficient detail to identify the 
customer.\193\ The Commission preliminarily believes that the customer 
name and address would be sufficient detail to identify the customer. 
In addition, the proposed Rule would require the provision of customer 
account information, which would be defined in proposed Rule 613(j)(2) 
to include but not be limited to: (1) The account number; (2) account 
type (e.g. options); (3) customer type (e.g., retail, mutual fund, 
broker-dealer proprietary); (4) the date the account was opened; and 
(5) the large trader identifier (if applicable).\194\ The Commission 
preliminarily believes that information on the type of account and when 
it was opened would be important to investigations of potential insider 
trading. For example, knowing when in time the customer opened the 
account in relation to the suspicious trading activity, or whether the 
customer changed account authorization to permit options trading just 
before suspicious options trading, could be evidence of intent. The 
Commission notes that currently any member receiving orders from a 
customer would be required, as part of its compliance with its books 
and records requirements,\195\ to take reasonable and appropriate steps 
to ensure the accuracy of the customer information received. This 
should not change, if this proposal were adopted, with respect to 
customer information recorded and provided to the central repository.
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    \193\ See proposed Rule 613(c)(7)(i)(A).
    \194\ See proposed Rule 613(c)(7)(i)(C). See also Large Trader 
Proposal, supra note 11.
    \195\ See, e.g., Rules 17a-3, 17a-4, and 17a-25 under the 
Exchange Act, 17 CFR 240.17a-3, 17a-4, and 17a-25.
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    The proposed Rule also would require a unique customer identifier 
for each customer.\196\ The unique customer identifier should remain 
constant for each customer, and have the same format, across all 
broker-dealers. This unique customer identifier would serve a similar 
purpose to a customer's social security number or tax identification 
number, obviating the need to include that information in the 
consolidated audit trail data. The Commission is not proposing to 
mandate the method for achieving this requirement, so as to allow those 
entities subject to the proposed Rule flexibility to determine the most 
practical way to accomplish the requirement of having unique customer 
identifiers. However, one alternative could be to have the central 
repository be responsible for assigning a unique customer identifier in 
response to an input by a member of a customer's social security number 
or tax identification number. If the customer already has been assigned 
a unique identifier because of a prior request by another member, the 
central repository would provide to the member that same identifier. If 
no unique identifier has previously been assigned, the central 
repository could assign a new one. Access to this part of the central 
repository's functionality could be more tightly controlled than access 
to the consolidated audit trail data, to help ensure the 
confidentiality of the social security or tax identification numbers.
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    \196\ See proposed Rule 613(c)(7)(i)(B).
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    The Commission requests comment as to whether each item of 
information regarding the customer is necessary for an effective 
consolidated audit trail. Is there any additional data that should be 
included to help identify the customer submitting the order? The 
Commission also requests comment on the proposed definition of 
customer. For example, should the definition only include the person 
exercising investment discretion? Should the definition include the 
beneficial owner? Should the customer information requirement also 
include a unique identifier for the particular computer algorithm used 
by the firm to generate the order, if applicable? Is there a better way 
to identify in the audit trail individual algorithmically-generated 
trading strategies? Should each trading desk at a member be required to 
have its own unique customer identifier, to the extent the trading desk 
is originating orders for the account of the member? This information 
on specific algorithms or trading desks could be useful to focus an 
inspection or investigation, if regulators could tell from the audit 
trail data that there was a pattern of suspicious trading activity from 
a specific algorithm or desk.
    The Commission requests comment as to what systems modifications, 
if any, would be required for members to collect and to provide this 
customer identification information to the central repository. Do 
broker-dealers currently keep this information electronically? If not, 
what changes would need to be made to collect and provide this 
information for existing accounts to the central repository? What would 
be the cost of converting this information into an electronic, 
accessible and linked format? Please be specific in your response. 
Further, the Commission requests comment on whether there are laws or 
other regulations in non-U.S. jurisdictions that would limit or 
prohibit a member from obtaining the proposed customer information for 
non-U.S. customers. If so, what are they? How do members currently 
obtain such information for such customers? If there are special 
difficulties in obtaining customer information from non-US 
jurisdictions, how should the consolidated audit trail be modified or 
otherwise reflect that difficulty?
    The Commission requests comment on other possible ways to develop 
and implement unique customer identifiers. For example, who should be 
responsible for generating the identifier? The Commission also requests 
comment on whether a unique customer identifier, together with the 
other information with respect to the customer that would be required 
to be provided under the proposed Rule, is sufficient to identify 
individual customers. Are there any concerns about how the customer 
information will be protected? If so, what steps should be taken to 
ensure appropriate safeguards with respect to the submission of 
customer information, as well as the receipt, consolidation, and 
maintenance of such information in the central repository.
    In addition, the Commission requests comment on whether the 
requirement to provide customer information to the central repository 
in real time would impact market participants' trading activity? If so, 
how so? For example, would market participants be hesitant to

[[Page 32574]]

engage in certain legal trading activity because of a concern about 
providing customer information in real time? Would market participants 
shift their trading activity to products or markets that do not require 
the capture of customer information to avoid compliance with this 
requirement of the proposed Rule? If so, how should the Commission 
address those concerns? On the other hand, would enhanced surveillance 
of the markets as a result of the consolidated audit trail attract 
additional trading volume to the U.S. markets?
ii. National Securities Exchange, National Securities Association and 
Broker-Dealer Identifier Information
    Each member originating or receiving an order from a customer, and 
each national securities exchange, national securities association, and 
member that subsequently handles the order, would be required to 
include its own unique identifier in each report it sends to the 
central repository for a reportable event. Such an identifier would 
allow the Commission and SRO staff to determine which member 
facilitated the transaction and assist in assessing compliance with 
various SRO or Commission rules, such as the limit order display rule 
(Rule 604 of Regulation NMS).\197\ This is especially important for 
ensuring that individual customer orders are handled and executed in 
accordance with SRO and Commission rules. In addition, routing 
decisions are an important aspect in assessing order execution quality 
and compliance with a member's duty of best execution. Further, if 
applicable, the member receiving an order from a customer would be 
required to report an identifier specifying the branch office and the 
registered representative at the member receiving the order. These 
identifiers would be unique to the exchange, association, member, 
branch office, and registered representative.
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    \197\ 17 CFR 242.604.
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    The proposed Rule would not require that these unique identifiers 
``travel'' with an order throughout its life, but would require that 
the unique identifier of each member or SRO that is taking an action 
with respect to the order be attached to the report of each reportable 
event that the member, exchange or association is reporting to the 
central repository. Each report in the life of the order would be able 
to be linked together at the central repository through the unique 
order identifier. Therefore, the Commission preliminarily does not 
believe that the unique identifier of each member or market that 
touches an order needs to travel with the order for the life of the 
order as long as the unique identifier of the member or exchange taking 
the action is included. For example, if Member A receives an order from 
a customer, Member A would be required to report the receipt of that 
order to the central repository and include Member A's unique 
identifier. If Member A then routed that order to another member, 
Member B, Member A would be required to report the routing of that 
order to the central repository and include Member A's unique 
identifier as well as the unique identifier of Member B. Likewise, 
Member B would be required to report the receipt of that order from 
Member A to the central repository and include the unique identifiers 
of Member A and Member B. If Member B then routed the order to Exchange 
A for execution, Member B would be required to report the routing of 
the order to the central repository and include the unique identifier 
of Member B and Exchange A, but not Member A.
    The Commission requests comment as to who should be responsible for 
generating unique identifiers for national securities exchanges, 
national securities associations, and their members. Would it be 
feasible for each national securities exchange, national securities 
association, or member to develop its own identifier for this purpose? 
The Commission also requests comment on the level of specificity for 
each unique member identifier--should it be designed to identify the 
firm, trading desk or individual registered representative? What are 
the advantages or disadvantages of requiring a unique identifier that 
would allow identification of an individual registered representative 
as opposed to just the member entity? The Commission also requests 
comment on procedures or safeguards market participants believe are 
necessary or appropriate so that these unique identifiers are routed 
accurately.
iii. Receipt or Origination of an Order
    The proposed Rule would require the NMS plan to require members of 
each of the exchanges and FINRA to collect and provide to the central 
repository certain key items of information about an order as soon as 
the member receives or originates an order, including the customer 
information as described above. The proposed Rule would require the 
member to report the date and time (to the millisecond) that an order 
was originated or received.\198\ The member also would be required to 
report the material terms of the order.\199\ Material terms of the 
order would be defined to include, but not be limited to, the following 
information: (1) The NMS security symbol; (2) the type of security; (3) 
price(s) (if applicable); (4) size (displayed and non-displayed); (5) 
side (buy/sell); (6) order type; (7) if a sell order, whether the order 
is long, short, or short exempt;\200\ (8) if a short sale, the locate 
identifier; (9) open/close indicator; (10) time in force (if 
applicable); (11) whether the order is solicited or unsolicited; (12) 
whether the account has a prior position in the security; (13) if the 
order is for a listed option, option type (put/call), option symbol or 
root symbol, underlying symbol, strike price, expiration date, and 
open/close; and (14) any special handling instructions.\201\
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    \198\ See proposed Rule 613(c)(7)(i)(H). Requiring time to the 
millisecond is consistent with current industry standards. The SIPs 
currently support millisecond time stamps. See, e.g. SIAC's CQS 
Output Specifications Revision 40 (January 11, 2010); SIAC's CTS 
Output Specifications Revision 55 (January 11, 2010); and Nasdaq's 
UTP Plan Quotation Data Feed Interface Specifications Version 12.0a 
(November 9, 2009).
    \199\ See proposed Rule 613(c)(7)(i)(I).
    \200\ A broker or dealer must mark all sell orders of any equity 
security as long, short, or short exempt. See Rule 200(g)(1) under 
the Exchange Act, 17 CFR 242.200(g)(1). A sell order may be marked 
short exempt only if the conditions of Rule 201(c) or (d) under the 
Exchange Act are met (17 CFR 242.201(c) and (d)). See Rule 
200(g)(2), 17 CFR 242.200(g)(2).
    \201\ See proposed Rule 613(j)(3).
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    The information described would assist the SROs, and the Commission 
as well, in determining the exact time of order receipt or origination, 
as well as provide a record of all of the original material terms of an 
order. The entry time of orders can be critical information in 
enforcement cases. In insider trading investigations, for example, the 
entry time of the order may be a critical piece of evidence in 
determining whether or not an individual acted with the requisite 
scienter to violate the federal securities laws. Similarly, in 
investigating possible market abuse violations, such as trading ahead 
of a customer order, the relationship between order origination, the 
terms of the order, and order entry of various other orders on multiple 
venues, may be at issue. As noted above, requiring that the time of a 
reportable event be reported in milliseconds is consistent with current 
industry standards. The Commission requests comment on whether this is 
an appropriate time standard. Do commenters believe that the time 
standard should be shorter? If so, what should be the standard, and 
why? Would requiring a shorter time standard for reporting actually 
provide more

[[Page 32575]]

precision in the timing of events? How would your answer be impacted by 
the extent to which market participants' clocks are synchronized? 
Alternatively, do commenters believe that it would be more appropriate 
to require in the proposed Rule that the time of reporting be 
consistent with industry standards, rather than including a specific 
time standard (recognizing that the SROs could choose to include a 
specific time standard in the NMS plan)?
    An open/close indicator currently is required to be submitted to 
exchanges for listed option orders \202\ and indicates whether the 
trade is opening a new position or increasing an existing position 
rather than closing or decreasing an existing position. The open/close 
indicator provides information to more easily track the size and 
holding time for individual positions, and thus to more easily track 
open interest and short interest. In addition, an open/close indicator 
could be used to indicate when a buy order in a stock is a buy to cover 
on a short sale. This information is useful in investigating short 
selling abuses and short squeezes. For example, a build up of a large 
short position by one investor along with the spreading of rumors may 
be indicative of using short selling as a tool to potentially 
manipulate prices. Information on when the position decreases is also 
useful for indicating potential manipulation, insider trading, or other 
rule violations. Information on whether the account has a prior 
position in the security is useful in a number of investigations. For 
example, the ability to easily determine whether an order adds to a 
position, along with the timing of the order, is particularly important 
in detecting and investigating portfolio pumping or marking the close. 
Also, information on whether the account has a prior position may be 
important in investigating ``layering'' or ``spoofing.'' Layering and 
spoofing are manipulations where orders are placed close to the best 
buy or sell price with no intention to trade in an effort to falsely 
overstate the liquidity in a security.
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    \202\ See, e.g., CBOE Rule 6.51; BATS Rule 20.7; and ISE Rule 
1404.
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    The Commission intends that the items of information required to be 
reported to the central repository for the receipt or origination of an 
order, at a minimum, include substantially all of the information 
currently required to be reported, or provided upon request, under the 
exchanges' and FINRA's existing order audit trail rules, as well as the 
EBS system rules and Rule 17a-25 under the Exchange Act. The Commission 
requests comment as to whether there are any items of information that 
are required to be recorded and reported by existing audit trail rules, 
or to be provided to the SROs or Commission upon request, that are not 
included within the proposed Rule that commenters believe should be 
included. If there are, please identify each item of information and 
discuss why you believe that such information should be included in the 
proposed consolidated audit trail. The Commission also requests comment 
on whether there are items of information included in the current SRO 
audit trails, and which are proposed to be included in the consolidated 
audit trail, that are unnecessary for surveillance, investigative or 
other regulatory purposes. If so, what are these data elements and why 
are they not necessary as part of a consolidated audit trail? Are they 
relevant for other purposes? The Commission further requests comment on 
whether it should require, as part of the disclosure of special 
handling instructions, the disclosure of an individual algorithm that 
may be used by a member or customer to originate or execute an order, 
and if so, how such an algorithm should be identified.
    As noted above, members currently are required to indicate whether 
an order would open or close a position for listed options.\203\ The 
Commission requests comment as to what extent members currently obtain 
or have access to this information from their customers, or track this 
information for their own proprietary orders, for all NMS securities. 
If members currently do obtain this information, is the information 
collected and stored electronically? If members currently do not have 
access to or obtain this information for customer orders, what would be 
the impact of the proposed requirement to collect and provide this 
information to the central repository? What would be the costs, if any, 
of collecting and providing this information? Please explain and 
quantify any potential impact or costs.
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    \203\ Id.
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    The proposed Rule does not specify exact order types (e.g., market, 
limit, stop, pegged, stop limit) to be included as material terms of an 
order because order types may differ across markets, and even an order 
type with the same title may have a different meaning from one exchange 
to another. Further, markets are frequently creating new order types 
and eliminating existing order types. In addition, the Commission notes 
that it may be difficult to distinguish between an ``order type'' and a 
special handling instruction, such as ``do not display.'' The 
Commission therefore preliminarily believes that it would not be 
practical to include in the proposed Rule a list of order types in the 
required information to be reported to the central repository. The 
Commission notes, however, that the SROs may choose to include more 
detail in the NMS plan. The Commission requests comment on this 
approach. The Commission also requests comment as to whether there are 
other items of information that would be required to be reported to the 
central repository that have, or may have, different meanings across 
different exchanges. If so, what are they? How should these differences 
be addressed in the proposed Rule?
    The proposed Rule also would require the NMS plan to require each 
member of an exchange or FINRA to ``tag'' each order received or 
originated by the member with a unique order identifier that would be 
reported to the central repository and that would stay with that order 
throughout its life, including routing, modification, execution, and 
cancellation.\204\ The members, exchanges, and FINRA would be required 
to pass along the unique order identifier with the order when routing 
the order, and the unique order identifier would be required on each 
reportable event report. For example, Member ABC that receives an order 
from a customer would immediately assign it a unique order identifier, 
and would report that identifier to the central repository along with 
the rest of the required information. If Member ABC subsequently routed 
the order to another member, Member DEF, Member ABC would be required 
to pass along to Member DEF the unique order identifier, as well as to 
attach the unique order identifier when reporting the routing of the 
order to the central repository. If Member DEF routed the order to 
Exchange A for execution, Member DEF would pass along to Exchange A 
with the order the unique order identifier, and would attach the 
identifier on the report of the route sent to the central repository. 
Exchange A would be required to attach the unique order identifier when 
reporting receipt of the order, and an execution of the order (if 
applicable) to the central repository.
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    \204\ See proposed Rule 613(c)(7)(i)(D).
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    The Commission recognizes that the reality of how orders are routed 
and executed often is complex, and that it likely is not feasible to 
anticipate how the proposed requirement for a unique

[[Page 32576]]

order identifier would or would not apply to each different factual 
scenario. For example, members may often execute customer orders on a 
``riskless principal'' basis,\205\ rather than on an agency basis. The 
Commission preliminarily believes that it would not be practical or 
feasible to ``link'' through related unique order identifiers the 
customer order(s) and the member's proprietary order(s) from which the 
customer order is given an allocation. Rather, the Commission envisions 
that the member would create a new unique order identifier for each 
proprietary order, and that the manner in which the execution of the 
customer order would be ``linked'' with one (or more) proprietary 
order(s) (if at all) would be through the inclusion of the unique order 
identifier for the contra-side order(s) on the report of the execution 
of the customer order sent to the central repository.\206\ However, in 
a situation where a member merely broke up a larger customer order into 
smaller orders and sent those orders, on an agency basis, to multiple 
markets for execution, the Commission preliminarily believes that the 
unique order identifier of the original customer order should carry 
through in some manner to the individual smaller orders that result 
when the original order is broken up. For example, it may be necessary 
to attach two unique order identifiers to an order--the original order 
identifier (i.e. parent order) and the individual smaller order 
identifier (i.e. child order). Alternatively, the unique order 
identifier of the parent order could be modified to carry through to 
the child orders (for example, the parent order could have an 
identifier ABC and the child orders could have identifiers of ABC1 and 
ABC2).
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    \205\ For example, a member receives a customer order, and 
rather than sending the customer order as an agency order to an 
exchange or other marketplace to execute, the member creates an 
order for its proprietary account that it sends to an exchange or 
other marketplace to be executed. Once an execution occurs in the 
proprietary account, the member would then execute the customer 
order against its proprietary account. This process can be 
complicated by the member receiving and handling more than one 
customer order at a time, and creating one or more proprietary 
orders to send to one or more markets, and the manner in which the 
member allocates executions from its proprietary account among the 
customer orders.
    \206\ See proposed Rule 613(c)(7)(vi)(C).
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    The Commission preliminarily believes that a unique order 
identifier that is essentially transferred along with an order from 
origination through execution or cancellation is useful for a 
consolidated audit trail. The use of such an identifier would allow the 
SROs and the Commission to efficiently link all events in the life of 
an order and help create a complete audit trail across markets and 
broker-dealers that handle the order. In this manner, being able to 
link the parent order with the child orders through the unique order 
identifiers would allow for ease of tracking of the original parent 
order throughout its life. While the Commission believes that a unique 
order identifier is an important data element for the consolidated 
audit trail, the Commission is not proposing at this time to mandate 
the format of such an identifier or how the identifier would be 
generated.
    The Commission requests comment on whether, and why, a unique order 
identifier that would stay with the order for the life of the order is 
useful or essential for an effective consolidated audit trail. In 
addition, the Commission requests comment on whether there is an 
alternative to a unique order identifier that would stay with the order 
for the life of the order. For example, would permitting each member or 
SRO that receives an order from another member or SRO to attach its own 
unique identifier to an order allow the SROs to efficiently link all 
events in the life an order and ensure the creation of a complete audit 
trail across each market and broker-dealer that handled the order? The 
Commission requests comment on the feasibility and merits of the manner 
in which it proposes unique order identifiers be handled for riskless 
principal transactions. The Commission also requests comment on the 
feasibility and merits of requiring that a unique order identifier be 
attached to an order, as well as the multiple orders that may result if 
the original order is subsequently broken up into several orders, in a 
manner that would permit regulators to trace the subsequent orders back 
to the original single order. The Commission also requests comment on 
the feasibility and merits of requiring that a unique order identifier 
be attached to an order that is the result of a combination of two more 
orders in a manner that would permit regulators to trace the combined 
order back to its component orders. The Commission further requests 
comment as to how unique order identifiers could be generated for both 
electronic and manual orders, and who should be responsible for 
generating them. Given the significant number of orders (including 
quotations) for which information would be required to be collected and 
provided to the central repository pursuant to the proposed Rule, the 
Commission requests comment on the feasibility of allowing unique order 
identifiers to be re-used. If unique order identifiers were to be re-
used, at what point should that be allowed? Are there any concerns with 
re-use that should be addressed? Additionally, the Commission requests 
comment on whether it is feasible to require unique order identifiers 
if the consolidated audit trail is implemented in the proposed phased 
approach? For example, is it appropriate to require that national 
securities exchanges and national securities associations comply with 
this requirement before their members are required to do so?
    The Commission also requests comment on procedures or safeguards 
market participants may wish to establish to ensure that unique order 
identifiers are routed and reported accurately. Further, the Commission 
requests comment on what systems modifications, if any, would be 
required in order to ``tag'' every order with a unique order 
identifier. Please respond to each question with specificity.
iv. Routing
    The proposed Rule would require that the NMS plan require the 
collection and reporting to the central repository of all material 
information related to the routing of an order. Specifically, the 
proposed Rule would require the reporting of the following information 
each time an order is routed by the member or SRO that is doing the 
routing: (1) The unique order identifier; (2) the date on which an 
order was routed; (3) the exact time (in milliseconds) the order was 
routed; (4) the unique identifier of the broker-dealer or national 
securities exchange that routes the order; (5) the unique identifier of 
the broker-dealer or national securities exchange that receives the 
order; (6) the identity and nature of the department or desk to which 
an order is routed if a broker-dealer routes the order internally; 
\207\ and (7) the material terms of the order.\208\
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    \207\ Internal routing information can be a critical element in 
assessing whether a member may be disadvantaging customer orders, 
either by trading ahead of customer orders, or by executing orders 
as principal at prices inferior to the NBBO.
    \208\ See proposed Rule 613(c)(7)(ii).
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    Further, the proposed Rule would require the collection and 
reporting by the SRO or member receiving an order of the following 
information each time a routed order is received: (1) The unique order 
identifier; (2) the date on which the order is received; (3) the time 
at which the order is received (in milliseconds); (4) the unique 
identifier of the broker-dealer or national securities exchange 
receiving the order; (5) the unique identifier of the broker-

[[Page 32577]]

dealer or national securities exchange routing the order; and (6) the 
material terms of the order.\209\
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    \209\ See proposed Rule 613(c)(7)(iii).
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    This information would allow regulatory staff to easily identify 
each member or exchange that ``touches'' the order during its life, as 
well as the dates and times at which each member or exchange receives 
and reroutes the order, and any changes that may be made to the 
original terms of the order along the way. The Commission preliminarily 
believes that this information for orders that are routed would allow 
the Commission and SROs to efficiently track an order from inception 
through cancellation or execution.
    The Commission requests comment as to whether such information 
regarding the routing of orders is useful or necessary for an effective 
consolidated audit trail. Should any additional information be included 
in the consolidated audit trail relating to routing? The Commission 
requests comment as to what systems modifications, if any, would be 
required to provide this information. Do members currently have, or 
have access to, this information? If not, what changes would need to be 
made to collect this information for existing accounts for submission 
to the central repository? Do commenters believe that it would be 
necessary to achieve the purposes of the proposed Rule to require 
information from each member or SRO that ``touches'' an order? Please 
explain with specificity why or why not. Is it feasible to require 
information relating to the routing of orders if the consolidated audit 
trail is implemented in the proposed phased approach? For example, is 
it appropriate to require that national securities exchanges and 
national securities associations comply with this requirement before 
their members are required to do so?
v. Modification, Cancellation, and Execution
    The proposed Rule would require the NMS plan to require that 
information be reported to the central repository concerning any 
modifications to the material terms of an order or partial or full 
order cancellations. The national securities exchange, national 
securities association, or member handling the order at the time would 
be required to immediately report to the central repository the 
following information: (1) The unique order identifier, (2) the date 
and time (in milliseconds) that an order modification or cancellation 
was originated or received; (3) the identity of the person responsible 
for the modification or cancellation instruction; (4) the price and 
remaining size of the order, if modified; and (5) other modifications 
to the material terms of the order.\210\ Information pertaining to 
order modifications and cancellations would assist the Commission and 
SROs in identifying all changes made to an order and the persons and 
broker-dealers responsible for the changes.
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    \210\ See proposed Rule 613(c)(7)(iv).
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    The proposed Rule also would require the following information on 
full or partial executions of orders to be collected and reported to 
the central repository: (1) The unique order identifier; (2) the 
execution date; (3) the time of execution (in milliseconds); (4) the 
capacity of the entity executing the order (whether principal, agency, 
or riskless principal); (5) the execution price; (6) the size of the 
execution; (7) the unique identifier of the national securities 
exchange or broker-dealer executing the order; \211\ and (8) whether 
the execution was reported pursuant to an effective transaction 
reporting plan or pursuant to the OPRA Plan, and the time of such 
report.\212\
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    \211\ Each national securities exchange and national securities 
association would have its own unique identifier, as well as each 
broker-dealer (member) (see supra Section III.D.1.ii.).
    \212\ See proposed Rule 613(c)(7)(v).
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    The Commission preliminarily believes that the required execution 
information, in combination with the proposed information pertaining to 
order receipt or origination, modification, or cancellation, would 
provide regulators with a comprehensive, near real time view of all 
stages and all participants in the life of an order. The proposed Rule 
would allow the Commission and SROs to identify, for a particular 
transaction, every member and national securities exchange involved in 
the receipt or origination, routing, modification, and execution (or 
cancellation) of the order. This order information, including the 
readily accessible customer information, should help regulators 
investigate suspicious trading activity in a more timely manner than 
currently possible.
    Additionally, the requirement to report whether and when the 
execution of the order was reported to the consolidated tape \213\ 
should allow regulators to more efficiently evaluate certain trading 
activity. For example, trading patterns of reported and unreported 
transactions may cause the staff of an SRO or the Commission to make 
further inquiry into the nature of the trading to determine whether the 
public was receiving accurate and timely information regarding 
executions and that market participants were continuing to comply with 
the trade reporting obligations under SRO rules. Similarly, patterns of 
reported and unreported transactions could be indicia of market abuse, 
including failure to obtain best execution for customer orders or 
possible market manipulation. Being able to more efficiently compare 
the consolidated order execution data with the trades reported to the 
consolidated tape could thus be an important component of overall 
surveillance activity.
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    \213\ Id. See also infra Section III.F.1. for a discussion of 
the requirement in proposed Rule 613(e)(5) that the NMS plan require 
the central repository to receive and retain on a current and 
continuing basis (i) the national best bid and national best offer 
for each NMS security, (ii) transaction reports reported pursuant to 
a transaction reporting plan filed with the Commission pursuant to, 
and meeting the requirements of, Rule 601 of Regulation NMS, and 
(iii) last sale reports reported pursuant to the OPRA Plan.
---------------------------------------------------------------------------

    As discussed above, the Commission recognizes that the execution of 
orders often is complex.\214\ For example, a customer order may be 
executed on a riskless principal basis. When a member receives a 
customer order, rather then sending the customer order as an agency 
order to an exchange or other marketplace for execution, the member 
creates an order for its proprietary account that it sends to an 
exchange or other marketplace to be executed. Once an execution occurs 
in the proprietary account, the member would then execute the customer 
order against its proprietary account. This process can be complicated 
by the member receiving and handling more than one customer order at a 
time, and creating one or more proprietary orders to send to one or 
more markets, and the manner in which the member allocates executions 
from its proprietary account among the customer orders. Each 
proprietary order would have a unique order identifier that is 
different from, and not linked to, the unique order identifier for the 
original customer order. How should the reporting to the central 
repository of the execution of the proprietary orders and the customer 
order be handled? As noted above, the Commission envisions that the 
manner in which the execution of the customer order would be ``linked'' 
with one (or more) of the proprietary order(s) would be through the 
inclusion of the unique order identifier for the contra-side order(s) 
on the report of the execution of the customer order sent to

[[Page 32578]]

the central repository.\215\ Is this practical? Is there another method 
by which to link the execution of the customer order to the proprietary 
orders? Is it necessary to do so to achieve the purposes of the 
consolidated audit trail?
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    \214\ See supra notes 205-206 and accompanying text.
    \215\ See supra note 206 and accompanying text.
---------------------------------------------------------------------------

    The Commission requests comment on whether the information proposed 
to be collected and reported would be sufficient to create a complete 
and accurate audit trail. Is there additional information that should 
be collected and reported? If yes, please describe the information and 
the value its collection and reporting would add to the consolidated 
audit trail.
2. Information To Be Collected Other Than in Real Time
    While the majority of order and execution information would be 
required to be transmitted to the central repository on a real time 
basis, the Commission recognizes that this may not be practical or 
feasible for all information because the information may not be known 
at the time of the reportable event.\216\ Thus, the Commission is 
proposing that certain information be transmitted to the central 
repository promptly after the national securities exchange, national 
securities association, or member receives the information, but in no 
instance later than midnight of the day that the reportable event 
occurs or the national securities exchange, national securities 
association, or member receives such information.\217\ The Commission 
preliminarily believes that this proposed time frame would provide 
sufficient time for an exchange, association, or a member to obtain the 
information required to be reported while still allowing regulators to 
access the information for regulatory purposes on a more timely basis 
than today.
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    \216\ For example, a member may receive an order during the day 
from an advisory customer but not know to which sub-accounts to 
allocate execution of the order until later in the day.
    \217\ See proposed Rule 613(c)(4).
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    Each national securities exchange, national securities association 
and their members would be required to report the account number for 
any subaccounts to which an execution is allocated.\218\ By requiring 
that this data be included in the consolidated audit trail, regulators 
would be able to more easily identify the ``ultimate'' customer for the 
trade. The Commission preliminarily believes that it would be useful to 
know the account number as well as the required information on the 
beneficial owner. For example, a person or groups of persons could 
trade through a single account or numerous accounts. Because individual 
traders may use multiple accounts at multiple broker-dealers, being 
able to identify the beneficial owner of the underlying accounts aids 
in the identification and investigation of suspicious trading activity. 
Similarly, traders may seek to hide manipulative activity from 
regulatory oversight by trading anonymously through omnibus accounts. 
In those instances, linking the trade to the individual trader requires 
the market center to be able to identify both the accounts trading and 
the beneficial owner or owners of those accounts to determine what 
person or group of persons is directing the specific trades at issue. 
Requiring the identity of the ultimate customer electronically to be 
attached to each order would make this information easily accessible 
and searchable and thus would greatly improve the usefulness of audit 
trail information for purposes of effective enforcement and cross-
market surveillance.
---------------------------------------------------------------------------

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

    Each national securities exchange, national securities association 
and their members also would be required to report the unique 
identifier of the clearing broker or prime broker for the transaction, 
if applicable, and the unique order identifier of any contra-side 
order.\219\ Finally, if the execution is cancelled, a cancelled trade 
indicator would be required to be reported. In addition, the proposed 
Rule also would require the reporting of any special settlement terms 
for the execution, if applicable; short sale borrower information and 
identifier; and the amount of a commission, if any, paid by the 
customer, and the unique identifier of the broker-dealer(s) to whom the 
commission is paid.\220\
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    \219\ See proposed Rule 613(c)(7)(vi)(B) and (C).
    \220\ See proposed Rule 613(c)(7)(vi)(D), (E), and (F).
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    Broker-dealers have a duty of best execution.\221\ Since 
commissions can be charged either explicitly through a separate fee or 
implicitly in the transaction price, the lack of easily accessible 
commission fee data alongside transaction price data may make it hard 
to identify the ``all-in'' price of execution and, thus, hard to 
determine whether the obligation to seek best execution was met.\222\ 
In addition, broker-dealers also must comply with just and equitable 
principles of trade under NASD rules that require them to charge fair 
commissions and mark-ups (mark-downs), and the lack of easily 
accessible commission fee data may make it hard to determine whether 
just and equitable principles of trade have been observed.\223\ Also, 
FINRA rules prohibit certain quid pro quo arrangements in the 
distribution of IPOs.\224\
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    \221\ A broker-dealer has a legal duty to seek to obtain best 
execution of customer orders. See, e.g., Newton v. Merrill, Lynch, 
Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269-70, 274 (3d Cir.), 
cert. denied, 525 U.S. 811 (1998); Certain Market Making Activities 
on Nasdaq, Securities Exchange Act Release No. 40900 (Jan. 11, 1999) 
(settled case) (citing Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971); 
Arleen Hughes, 27 SEC 629, 636 (1948), aff'd sub nom. Hughes v. SEC, 
174 F.2d 969 (D.C. Cir. 1949)). See also Order Execution 
Obligations, Securities Exchange Act Release No. 37619A (Sept. 6, 
1996), 61 FR 48290 (Sept. 12, 1996) (``Order Handling Rules 
Release''). A broker-dealer's duty of best execution derives from 
common law agency principles and fiduciary obligations, and is 
incorporated in SRO rules and, through judicial and Commission 
decisions, the antifraud provisions of the federal securities laws. 
See Order Handling Rules Release, 61 FR at 48322. See also Newton, 
135 F.3d at 270. The duty of best execution requires broker-dealers 
to execute customers' trades at the most favorable terms reasonably 
available under the circumstances, i.e., at the best reasonably 
available price. Newton, 135 F.3d at 270. Newton also noted certain 
factors relevant to best execution--order size, trading 
characteristics of the security, speed of execution, clearing costs, 
and the cost and difficulty of executing an order in a particular 
market. Id. at 270 n.2 (citing Payment for Order Flow, Exchange Act 
Release No. 33026 (Oct. 6, 1993), 58 FR 52934, 52937-38 (Oct. 13, 
1993) (Proposed Rules)). See In re E.F. Hutton & Co., Securities 
Exchange Act Release No. 25887 (July 6, 1988). See also Securities 
Exchange Act Release No. 34902 (October 27, 1994), 59 FR 55006, 
55008-55009 (November 2, 1994) (``Approval of Payment for Order Flow 
Final Rules''). See also Securities Exchange Act Release No. 51808 
(June 9, 2005), 70 FR 37496 (June 29, 2005) (``NMS Adopting 
Release''), at 37537 (discussing the duty of best execution).
    \222\ The term ``all-in'' price is intended to capture the total 
costs for executing a trade.
    \223\ See FINRA Rule 2010 and IM-2440-1.
    \224\ See FINRA Rule 5130. The Rule ensures that: (1) FINRA 
members make bona fide public offerings of securities at the 
offering price; (2) members do not withhold securities in a public 
offering for their own benefit or use such securities to reward 
persons who are in a position to direct future business to members; 
and (3) industry insiders, including FINRA members and their 
associated persons, do not take advantage of their insider position 
to purchase ``new issues'' for their own benefit at the expense of 
public customers. For example, information on commissions could help 
detect a transaction in the secondary market between an underwriter 
and an investor at an excessively high commission rate that is a 
``quid pro quo'' for the underwriter allocating shares in a ``hot'' 
IPO to the investor.
---------------------------------------------------------------------------

    The Commission requests comment on the usefulness and necessity of 
requiring the reporting of each of these items of information to 
achieve the stated objectives of the consolidated audit trail. Are 
there practical difficulties associated with providing this information 
as proposed? Is there additional information that would be useful or 
necessary in this regard? For example, the proposed Rule would require 
the reporting of a cancelled trade indicator, for executions that are 
cancelled. Should the proposed Rule

[[Page 32579]]

require separate identification of trades that are broken pursuant to 
the rules of the applicable SRO at the request of one party to a 
transaction or upon the SRO's own motion, and trades that are cancelled 
by mutual agreement of the parties? Why or why not? The Commission also 
requests comment on whether the proposed requirement to report the 
identity of the clearing broker would provide sufficient information on 
``give-up'' arrangements,\225\ or whether additional information should 
be required to be reported.
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    \225\ In a typical give-up arrangement, a broker-dealer that is 
not a member of an exchange (Broker-dealer A) may route the order to 
another broker-dealer that is a member of an exchange (Broker-dealer 
B) for execution on that exchange. If Broker-dealer B is not also a 
clearing member of the exchange, it may ``give-up'' the execution of 
that order to another broker-dealer that is a clearing member of 
that exchange (Broker-dealer C). Further, there may be a 
corresponding ``flip'' of the trade from Broker-dealer C's account 
to the account of the broker-dealer that is the clearing firm for 
Broker-dealer A.
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    The Commission requests comment on the proposed time frame for 
reporting of this information. The Commission is proposing that the 
information not required to be reported in real time be reported 
promptly after receipt, but in no event later than midnight on the day 
the reportable event occurs or the exchange, association, or member 
receives the information. While one of the objectives of the proposed 
Rule is to collect data on a real time basis, the Commission 
understands that certain information may not be available at the time 
of the reportable event (e.g., the execution or cancellation). The 
Commission, however, believes such information should be provided 
promptly after receipt, meaning as soon as possible given the 
capabilities of a market participant's systems. While the Commission is 
proposing that the information be reported promptly, the proposed Rule 
also would provide an objective time limit for providing the 
information--no later than midnight on the day the event occurs or the 
information is received by the exchange, association, or member. Is the 
proposed time frame reasonable with respect to the information that 
would be required to be reported? Should the proposed Rule only require 
that information be reported promptly after receipt? How should 
promptly be measured? Alternatively, should the proposed Rule only 
require that information not available at the time the reportable event 
occurs be reported no later than midnight on the day the information 
was received? How would this standard impact the usefulness of the 
consolidated audit trail?

E. Clock Synchronization

    The Commission believes that clock synchronization is necessary to 
ensure an accurate audit trail, given the number of market participants 
with internal order handling and trading systems that would be 
reporting information to the central repository. Therefore, proposed 
Rule 613(d) would provide that the NMS plan filed with the Commission 
include a requirement that each national securities exchange and 
national securities association, and their members, synchronize their 
business clocks that are used for the purposes of recording the date 
and time of any event that must be reported under the proposed Rule. 
The proposed Rule would require each exchange, FINRA, and their members 
to synchronize their clocks to the time maintained by the National 
Institute of Standards and Technology (``NIST''), consistent with 
industry standards.\226\ Exchanges, associations, and the members would 
be required to synchronize their business clocks in accordance with 
these requirements within four months after effectiveness of the NMS 
plan.\227\
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    \226\ See proposed Rule 613(d)(1).
    \227\ See proposed Rule 613(a)(3)(ii).
---------------------------------------------------------------------------

    The Commission is not proposing to set a standard within which the 
clocks must be synchronized to the NIST (e.g., to within one second of 
the NIST clock), in recognition of how quickly technology can improve 
and increase the speed at which orders are handled and executed. 
Rather, the Commission is proposing that the clocks be synchronized 
``consistent with industry standards.'' The exchanges and FINRA would 
be able, however, to set a limit in the NMS plan to be filed with the 
Commission. Also, in recognition of the pace at which technology 
improves, the proposed Rule provides that the NMS plan shall require 
each national securities exchange, national securities association, and 
its respective members to annually evaluate the actual synchronization 
standard adopted to consider whether it should be shortened, consistent 
with changes in industry standards.\228\ When engaging in this annual 
evaluation, exchanges, associations, and members could take into 
account the feasibility of shortening the time standard, and whether 
shortening the standard would allow for the conveyance of additional 
meaningful information to the consolidated audit trail.
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    \228\ See proposed Rule 613(d)(2).
---------------------------------------------------------------------------

    The Commission requests comment on whether this approach is 
practical and would provide for sufficient flexibility in determining 
how closely to synchronize clocks. Is the proposed Rule's requirement 
that each exchange, association, and member synchronize its clocks in 
accordance with the time maintained by NIST reasonable? To what extent 
do SROs and their members currently synchronize clocks? Please answer 
with specificity. Would synchronization as proposed require significant 
systems modifications on behalf of national securities exchanges, 
national securities association, or their respective members? Is it 
reasonable to require clocks to be synchronized with the time 
maintained by NIST within a time frame that is ``consistent with 
industry standards''? Is there another standard that should be used by 
the Commission? The Commission also requests comment on the feasibility 
of requiring the exchanges, FINRA, and their members to comply with 
these requirements within four months of effectiveness of the NMS plan.

F. Central Repository

    The proposed Rule would require that the NMS plan provide for the 
creation and maintenance of a central repository, which would be a 
facility of each exchange and FINRA.\229\ The central repository would 
be jointly owned and operated by the exchanges and FINRA, and the NMS 
plan would be required to provide, without limitation, the Commission 
and SROs with access to, and use of, the data reported to and 
consolidated by the central repository for the purpose of performing 
their respective regulatory and oversight responsibilities pursuant to 
the federal securities laws, rules, and regulations. Each of the 
exchanges and FINRA would be a sponsor of the plan,\230\ and as such 
would be responsible for selecting a plan processor to operate the 
central repository.\231\
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    \229\ See proposed Rule 613(e)(1).
    \230\ See supra note 173 for a definition of a plan sponsor in 
Rule 600(a)(70) of Regulation NMS, 17 CFR 242.600(a)(70).
    \231\ See infra Section III.I. for a definition and discussion 
of the plan processor.
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    The Commission requests comment on the need for a central 
repository to receive and retain the consolidated audit trail 
information. Are there alternatives to creating a central repository 
for the receipt of order audit trail information? The Commission also 
requests comment on whether it is practical or appropriate to require 
the exchanges and FINRA to jointly own and operate the central 
repository.

[[Page 32580]]

1. Responsibilities of Central Repository To Collect, Consolidate, and 
Retain Information
    The central repository would be responsible for the receipt, 
consolidation, and retention of all data submitted by the national 
securities exchanges, national securities associations and their 
members pursuant to the proposed Rule and the NMS plan.\232\ Further, 
the central repository would be required to collect from the central 
processors and retain on a current and continuous basis the NBBO for 
each NMS security, transaction reports reported pursuant to an 
effective transaction reporting plan filed with the Commission pursuant 
to, and meeting the requirements of, Rule 601 of Regulation NMS, and 
last sale reports reported pursuant to the OPRA Plan filed with the 
Commission pursuant to, and meeting the requirements of, Rule 608 of 
Regulation NMS.\233\ The central repository would be required to 
maintain this NBBO and transaction data in a format compatible with the 
order and event information reported pursuant to the proposed Rule.
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    \232\ See proposed Rule 613(e)(1).
    \233\ See proposed Rule 613(e)(5). The central repository would 
be required to retain the information collected pursuant to 
subparagraph (c)(7) and (e)(5) of the proposed Rule in a convenient 
and usable standard electronic data format that is directly 
available and searchable electronically without any manual 
intervention for a period of not less than five years. The 
information would be required to be available immediately, or if 
immediate availability could not reasonably and practically be 
achieved, any search query would be required to begin operating on 
the data not later than one hour after the search query is made. See 
proposed Rule 613(e)(6).
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    This requirement is intended to allow SRO and Commission staff to 
easily search across order, NBBO, and transaction databases. The 
Commission preliminarily believes that having the NBBO information in a 
format compatible with the order audit trail information would be 
useful for enforcing compliance with federal securities laws, rules and 
regulations. The NBBO is used by regulators to evaluate members for 
compliance with numerous regulatory requirements, such as the duty of 
best execution or Rule 611 of Regulation NMS.\234\ Regulators would be 
able to compare order execution information to the NBBO information on 
a more timely basis because the order and execution information would 
be available on a real time basis and all of the information would be 
available in a compatible format in the same database. The SROs also 
may enjoy economies of scale by adopting standard cross-market 
surveillance parameters for these types of violations. This information 
also would be available to the Commission to assist in its oversight 
efforts.
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    \234\ See Rule 611 of Regulation NMS, 17 CFR 242.611. See also 
ISE Rule 1901, NYSE Arca 6.94, and Phlx Rule 1084.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that requiring the 
central repository to collect and retain in its database the 
transaction information in a format compatible with the order execution 
information would aid in monitoring for certain market manipulations. 
As discussed above, the proposed Rule would require that each report of 
the execution (in whole or in part) of an order sent to the central 
repository include a notation as to whether the execution was reported 
to the consolidated tape pursuant to an effective transaction reporting 
plan or the OPRA Plan.\235\ This requirement should allow regulators to 
more efficiently evaluate certain trading activity. For example, 
trading patterns of reported and unreported trades may cause the staff 
of an SRO to make further inquiry into the nature of the trading to 
determine whether the public was receiving accurate and timely 
information regarding executions and that market participants were 
continuing to comply with the trade reporting obligations under SRO 
rules. Similarly, patterns of reported and unreported transactions 
could be indicia of market abuse, including failure to obtain best 
execution for customer orders or possible market manipulation. Being 
able to more efficiently compare the consolidated order execution data 
with the trades reported to the consolidated tape could thus be an 
important component of overall surveillance activity.
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    \235\ See supra Section III.D.1.v.
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    The Commission requests comment on the usefulness or necessity of 
requiring the central repository to collect and retain in a format 
compatible with the order audit trail information the NBBO and 
transaction report information to help achieve the stated objectives of 
the consolidated audit trail. Do commenters believe that it is 
important for achieving the purposes of the consolidated audit trail? 
If so, why? If not, why not? What are the advantages and disadvantages 
of maintaining transaction information separately from order and 
execution data included in the consolidated audit trail? Should the 
transaction information be included in the consolidated audit trail 
report? The Commission requests comment on whether the requirement that 
the transaction and NBBO information be maintained in a format 
compatible with the order information is practical. Would this 
requirement achieve the goal of helping SRO and Commission staff 
conducts searches and run surveillances across databases?
    The Commission has recently required that issuers report certain 
data in interactive data format such as XBRL.\236\ This proposal does 
not specify any particular or required data format, but allows the SROs 
to select a data format. Should the Commission require that the data be 
transmitted or stored in any particular format? What are the relative 
merits of flat data files, relational data files, and interactive data 
files? What other formats should be considered? In what format can the 
SROs and their members efficiently transmit data? In what format would 
the data required in the proposal be most easily accessed?
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    \236\ See Securities Act Release No. 9002 (January 30, 2009), 74 
FR 6776 (February 10, 2009) (Interactive Data to Improve Financial 
Reporting adopting release) (File No. S7-11-08).
---------------------------------------------------------------------------

    The proposed Rule would require the NMS plan to require the central 
repository to retain the information collected pursuant to subparagraph 
(c)(7) and (e)(5) of the proposed Rule in a convenient and usable 
standard electronic data format that is directly available and 
searchable electronically without any manual intervention for a period 
of not less than five years. The information would be required to be 
available immediately, or if immediate availability could not 
reasonably and practically be achieved, any search query would be 
required to begin operating on the data not later than one hour after 
the search query is made.\237\
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    \237\ See proposed Rule 613(e)(6).
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    The Commission preliminarily believes that the information (or the 
results of a query searching the information) should generally be 
available immediately. However, the Commission recognizes that the 
results of an electronic search query may not be immediately available 
because, for instance, the system must check an extremely large number 
of records to answer the query or the system may need to retrieve 
records from electronically archived data. In the case of archived 
data, the Commission preliminarily proposes requiring that the search 
query would need to begin operating on the data not later than one hour 
after the query is made. The Commission requests comment as to whether 
one hour would be reasonable amount of time to allow for accessing 
archived data. Under current technological limitations, how long should 
it take to access, in an electronic query with no manual intervention, 
archived data of the type to be held by

[[Page 32581]]

the central repository? The Commission also requests comment on whether 
it should mandate a time standard, such as one hour, in the proposed 
Rule. Further, the Commission requests comment on whether the central 
repository should be required to retain this information for longer or 
shorter than five years. The Commission also requests comment on the 
cost impact of these proposed record retention requirements. For 
example, could comparable functionality be obtained at lower cost with 
a different standard (for example, what would be the cost comparison 
for one hour versus two hours)?
2. Access to Central Repository and Consolidated Audit Trail 
Information and Confidentiality of Consolidated Audit Trail Information
    Each national securities exchange and national securities 
association, as well as the Commission, would have access to the 
central repository for purposes of performing its respective regulatory 
and oversight responsibilities pursuant to the federal securities laws, 
rules, and regulations. Such access would include access to all systems 
of the central repository, and access to and use of the data reported 
to and consolidated by the central repository.\238\ The proposed Rule 
also would require that the NMS plan provide that such access to and 
use of such data by each exchange, association, and the Commission for 
the purpose of performing its regulatory and oversight responsibilities 
pursuant to the federal securities laws, rules, and regulations shall 
not be limited.\239\ In addition, the proposed Rule would require that 
the NMS plan include a provision requiring the creation and maintenance 
by the central repository of a method of access to the consolidated 
data.\240\ This method of access would be required to be designed to 
include search and reporting functions to optimize the use of the 
consolidated data.
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    \238\ See proposed Rule 613(e)(2).
    \239\ Id.
    \240\ See proposed Rule 613(e)(3).
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    The Commission's access to the central repository, and access to 
and use of the data maintained by the central repository, for purposes 
of performing the Commission's responsibilities under the federal 
securities laws, rules, and regulations could not be limited in any 
way.\241\ The Commission requests comment as to whether the proposed 
Rule as proposed would accomplish this objective? If not, why not? If 
not, please provide comment as to an alternative or additional way to 
accomplish this objective. The Commission also requests comment on the 
advantages or disadvantages of Commission ownership or co-ownership of 
the data maintained by the central repository.
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    \241\ As noted above, the central repository would be a facility 
of each exchange and FINRA (see supra note 229 and accompanying 
text), and as such, subject to the Commission's recordkeeping and 
inspection authority. See, e.g., Section 17 of the Exchange Act, 17 
U.S.C. 78q. Further, any amendment to the NMS plan would be filed 
with the Commission pursuant to Rule 608 of Regulation NMS, and 
would not become effective unless approved by the Commission or 
otherwise as permitted in accordance with the requirements of Rule 
608. See proposed Rule 613(a)(5), and Rule 608(a) and (b) of 
Regulation NMS, 17 CFR 242.608(a) and (b).
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    As discussed above, the proposed Rule would require the reporting 
of customer information, as well as information about ``live'' orders, 
to the central repository on a real time basis. The Commission 
recognizes the sensitivity of this information, and believes that 
maintaining the confidentiality of, and limiting the use of, the data 
is essential. Without such protections, broker-dealers and the 
investing public could be at risk for security breaches that would 
potentially have a detrimental impact on their financial condition, as 
well as their trading activity and the markets. The consolidated data 
also would include information about members' trading activities on 
competitors' markets. The Commission therefore is proposing several 
requirements designed to limit access to, and help assure 
confidentiality and proper use of, the information.
    As noted above, the proposed Rule would limit the use of the 
consolidated data by the SROs for purposes of performing their 
respective regulatory and oversight responsibilities pursuant to the 
federal securities laws, rules, and regulations.\242\ This proposed 
restriction would not prevent any SRO from using the data that it 
individually collects and provides to the central repository pursuant 
to the proposed Rule for other purposes as permitted by applicable law, 
rule or regulation.
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    \242\ See proposed Rules 613(e)(2). See also proposed Rule 
613(e)(4)(i) (requiring in part that the NMS plan include a 
provision requiring all plan sponsors and their employees to agree 
not to use the consolidated data for any purpose other than 
surveillance and regulatory purposes).
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    The Commission requests comment as to whether access to the 
consolidated audit trail information should be limited to the SROs and 
the Commission, or whether there should be other access allowed. For 
example, should SROs or the central repository be allowed to make the 
data available to third parties, such as for academic research? If so, 
should the data be permitted to be sold to help offset costs? By SROs? 
By the central repository? If so, should there be set parameters? If 
the data were made available to third parties, what protections should 
be put in place to ensure the confidentiality of the data? Are there 
particular data elements that are more sensitive and should not be sold 
to help ensure the privacy of any individual and proprietary 
information? Are there particular data elements that would pose fewer 
concerns if released on a significant time lag? How long would such a 
time lag need to be? What other concerns might arise from the use of 
the data for non-regulatory purposes? Would use of the data provide 
certain market participants with undue information advantages over 
other market participants, increasing informational asymmetry in the 
markets? Would the provision of market data to third parties affect the 
willingness of market participants to trade in the U.S. markets? On the 
other hand, would enhanced surveillance of the markets as a result of 
the consolidated audit trail attract additional trading volume to the 
U.S. markets? What would be the implications, if any, under the 
financial privacy provisions of the Gramm-Leach-Bliley Act? \243\ The 
Commission also requests comment as to whether, and to what extent, 
other regulators, such as the Commodity Futures Trading Commission, 
should have access to the data? For instance, to what extent do 
commenters believe it would be beneficial for the Commission to work 
with other regulators to collectively share information each regulator 
has with respect to products and trading activity under its 
jurisdiction, to help the Commission and other regulators carry out 
their respective oversight of products and trading activity within 
their own jurisdiction? Would such sharing of information help the 
Commission better understand the impact of trading in other markets on 
trading activity and products within the Commission's jurisdiction?
---------------------------------------------------------------------------

    \243\ 15 U.S.C. 6801-6809.
---------------------------------------------------------------------------

    The Commission also requests comment on the feasibility of, and 
need for, a method of access to the consolidated data that includes 
search and reporting functions. In addition, the Commission requests 
comment as to whether, in addition to requiring the central repository 
to provide a method of access, the central repository should be 
required to bear the cost of making available the raw order data 
received by the central repository, for purposes of using that data to 
perform regulatory functions. Commenters are requested to

[[Page 32582]]

provide cost estimates for the provision of this data by the central 
repository to the SROs and the Commission.
    Proposed Rule 613(e)(4)(i) also would require that the NMS plan 
include policies and procedures, including standards, to be used by the 
plan processor to ensure the security and confidentiality of all 
information submitted to, and maintained by, the central repository. 
The plan sponsors, and employees of the plan sponsors and central 
repository, would be required to agree to use appropriate safeguards to 
ensure the confidentiality of such data, and not to use such data for 
other than for surveillance regulatory purposes.\244\ The Commission is 
not proposing to mandate the content or format of the policies and 
procedures and standards that would be required. Rather, the Commission 
believes that the SROs themselves are in the best position to determine 
how best to implement this requirement.
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    \244\ See proposed Rule 613(e)(4)(i). However, a plan sponsor 
would be permitted to use the data that it submits to the central 
repository for regulatory, surveillance, commercial, or other 
purposes as otherwise permitted by applicable law, rule or 
regulation. Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \245\ See proposed Rule 613(e)(4)(iii).
---------------------------------------------------------------------------

    In addition, the proposed Rule would require that the NMS plan 
include policies and procedures to ensure the accuracy of the 
consolidation of the data by the plan processor provided to the central 
repository. Again, the Commission notes that it is not proposing to 
mandate the form and content of such policies and procedures. Rather, 
it believes the SROs would be in a better position to determine how 
best to implement this requirement. The Commission requests comment on 
these proposed requirements. Is this approach practical to ensure the 
integrity of the data? Are there any alternative methods that would 
achieve the same purpose that are preferable? How much latency would 
result from a validation procedure?
    As noted above, the Commission believes it is critical to the 
integrity of the consolidated audit trail that data submitted to the 
central repository be submitted in a timely manner and be accurate and 
complete. To support this objective, as discussed below in Sections 
III.H.1 and III.H.2, the proposed Rule also would require the NMS plan 
to include mechanisms to ensure compliance by the plan sponsors and 
their members with the requirements of the plan.\246\ The purpose of 
the provisions, with respect to SRO compliance, is to require the SROs 
themselves to implement a method to help ensure compliance with the NMS 
plan, as is required by Rule 608 of Regulation NMS. Although the 
Commission is not proposing to mandate the format of the mechanism, the 
Commission preliminarily believes that it could include the imposition 
of penalties on an SRO in the event an SRO failed to comply with any 
provision of the NMS plan. Further, the Commission preliminarily 
believes that the mechanism to help ensure compliance by members could 
include the imposition of fines on a member, subject to the rules of 
the SRO of which it is a member, in the event a member failed to comply 
with the requirements of the NMS plan or the SRO's rules.
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    \246\ See proposed Rule 613(h)(3) and Rule 613(g)(4).
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G. Surveillance

    Proposed Rule 613(f) would require each national securities 
exchange and national securities association subject to the proposed 
Rule to develop and implement a surveillance system, or enhance 
existing surveillance systems, reasonably designed to make use of the 
consolidated information contained in the consolidated audit trail. The 
proposed Rule would require each national securities exchange and 
national securities association to implement such new or enhanced 
surveillance system within fourteen months after effectiveness of the 
NMS plan.\247\ Currently, SROs are required to surveil members' trading 
activity for compliance with federal securities laws, rules, and 
regulations, such as rules relating to front running, trading ahead, 
market manipulation, and quote rule

[[Page 32583]]

violations, as well as other Commission and SRO rules. The Commission 
understands that although SROs carry out certain surveillances in real 
time, such as for looking for pricing anomalies or other indicators of 
erroneous transactions, most surveillance currently is not done on a 
real time basis. The Commission preliminarily believes the systems that 
carry out this surveillance should be updated, or new systems should be 
created, to make use of the consolidated audit trail information that 
would be generated and maintained by the central repository, otherwise 
the purpose of requiring a consolidated audit trail would not be 
achieved.
---------------------------------------------------------------------------

    \247\ See proposed Rule 613(a)(3)(iv). The SROs would be 
required to begin reporting information to the central repository 
within twelve months after effectiveness of the NMS plan. The 
Commission is proposing to allow SROs two additional months (for a 
total of fourteen months) to update their surveillance systems to 
allow for testing of new surveillances for some period of time after 
the SROs begin providing information. The Commission requests 
comment on this time period. Should it be longer? Shorter? If so, 
why?
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \248\ 17 CFR 240.17d-2. For example, the exchanges have entered 
into an agreement for the allocation of regulatory responsibilities 
pursuant to Rule 17d-2 under the Exchange Act concerning the 
surveillance, investigation, and enforcement of insider trading 
rules pertaining to members of the NYSE and FINRA who are also 
members of at least one of the other participating SROs. See 
Securities Exchange Act Release No. 58806 (File No. 4-566) (October 
17, 2008), 73 FR 63216 (October 23, 2008).
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H. Compliance With the NMS Plan

1. Exchanges and Associations
    Any failure by a national securities exchange or national 
securities association that is a sponsor of the NMS plan to comply with 
the requirements of the NMS plan would undermine the effectiveness of 
the proposed Rule. Therefore, the Commission would consider full 
compliance by these entities with the NMS plan of the utmost 
importance. To this end, the proposed Rule would provide that each 
national securities exchange and national securities association shall 
comply with the provisions of the NMS plan of which it is a sponsor 
submitted pursuant to the proposed Rule and approved by the 
Commission.\249\ In addition, the proposed Rule would provide that any 
failure by a national securities exchange or national securities 
association to comply with the provisions of the NMS plan of which it 
is a sponsor could be considered a violation of the proposed Rule.\250\ 
For example, a failure to provide required information to the central 
repository, a failure to develop and implement a surveillance system or 
enhance existing surveillance systems reasonably designed to make use 
of the consolidated data in the central repository, or any limitation 
on the ability of an SRO or the Commission to access and use the data 
maintained by the central repository for regulatory purposes would 
violate the proposed Rule. The Commission recognizes that its staff, 
and the SRO staff, may have to undertake certain technical actions to 
access the data, such as arranging for a live feed, querying the 
system, or upgrading systems to be able to receive the data. The 
Commission preliminarily would not view having to take such technical 
actions, by themselves, as a limitation. The Commission notes that the 
proposed Rule would require the central repository to maintain the data 
in a convenient and usable standard electronic data format that is 
directly available and searchable electronically without any manual 
intervention for a period of not less than five years. The information 
would be required to be available immediately, or if immediate 
availability could not reasonably and practically be achieved, any 
search query would be required to begin operating on the data not later 
than one hour after the search query is made.\251\ The Commission 
requests comment on whether other types of technical actions should not 
be viewed as an impermissible limitation on access. The Commission 
further notes that Rule 608(c) under the Exchange Act provides that 
``[e]ach self-regulatory organization shall comply with the terms of 
any effective national market system plan of which it is a sponsor or a 
participant.'' \252\ Thus, under this proposed Rule, the Commission may 
take any action authorized under the Exchange Act to discipline 
national securities exchanges and national securities associations for 
failure to comply with a rule under the Exchange Act.
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    \249\ See proposed Rule 613(h)(1)
    \250\ See proposed Rule 613(h)(2).
    \251\ See proposed Rule 613(e)(6) and supra note 237 and 
accompanying text.
    \252\ 17 CFR 242.608(c).
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    The proposed Rule also would require that the NMS plan include a 
mechanism to ensure compliance by the sponsors with the requirements of 
the plan.\253\ The purpose of this provision is to require the SROs 
themselves to implement a method to help ensure compliance with the NMS 
plan, as is required by Rule 608 of Regulation NMS. Although the 
Commission is not proposing to mandate the format of the mechanism, the 
Commission preliminarily believes that it could include the imposition 
of penalties on an SRO in the event an SRO failed to comply with any 
provision of the NMS plan. The Commission request comments on the types 
of sanctions or penalties that would be appropriate for the plan 
sponsors to levy for failure of an SRO to comply with the terms of the 
NMS plan.
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    \253\ See proposed Rule 613(h)(3).
---------------------------------------------------------------------------

2. Members
    Any failure by a member of a national securities exchange or 
national securities association that is a sponsor of the NMS plan to 
collect and provide to the central repository the required audit trail 
information also would undermine the effectiveness of the proposed 
Rule. Therefore, the Commission would consider full compliance by these 
entities with the NMS plan of the utmost importance.
    To implement the proposed requirement that the NMS plan require the 
submission of certain information to the central repository by the 
members of the exchange and association sponsors of the plan, each 
exchange and

[[Page 32584]]

association would be required to file with the Commission pursuant to 
Section 19(b)(2) of the Exchange Act \254\ and Rule 19b-4 
thereunder,\255\ a proposed rule change to require its members to 
comply with the requirements of the proposed Rule and the NMS 
plan.\256\ The SROs would be required to file these proposed rule 
changes by 120 days after approval of the proposed Rule. The Commission 
preliminarily believes that this proposed time frame would provide the 
SROs sufficient time to file their proposed rule changes after the NMS 
plan has been approved,\257\ as the SRO rule filings would be 
substantially based on the content of the NMS plan.
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    \254\ 15 U.S.C. 78s(b)(2).
    \255\ 17 CFR 240.19b-4.
    \256\ See proposed Rule 613(g)(1). This provision in the 
proposed Rule echoes the requirement contained in Rule 608 that 
provides ``each self-regulatory organization also shall, absent 
reasonable justification or excuse, enforce compliance with any such 
plan by its members and persons associated with its members,'' 17 
CFR 242.608(c).
    \257\ The proposed Rule would require that the NMS plan be filed 
within 90 days of approval of the proposed Rule. See proposed Rule 
613(a)(1).
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    Further, the proposed Rule would directly require each member to 
(1) collect and submit to the central repository the information 
required by the Rule, and (2) comply with the clock synchronization 
requirements of the proposed Rule.\258\ In addition, the proposed Rule 
would require that the NMS plan include a provision that by subscribing 
to and submitting the plan to the Commission, each exchange and 
association that is a sponsor to the plan agrees to enforce compliance 
by its members with the provisions of the plan.\259\
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    \258\ See proposed Rule 613(g)(2).
    \259\ See proposed Rule 613(g)(3).
---------------------------------------------------------------------------

    Finally, the proposed Rule would require the NMS plan to include a 
mechanism to ensure compliance with the requirements of the plan by the 
members of a national securities exchange or national securities 
association that is a sponsor of the NMS plan submitted pursuant to 
this Rule and approved by the Commission.\260\ The purpose of this 
provision is to require the SROs to implement a method to help ensure 
compliance with the NMS plan and the corresponding SRO rules by their 
members. Although the Commission is not proposing to mandate the format 
of the mechanism, the Commission preliminarily believes that it could 
include the imposition of fines on a member by an SRO of which it is a 
member in the event the member failed to comply with any provision of 
the NMS plan or the SRO's rules implementing the NMS plan. Any action 
taken against the member, including the imposition of the fine by the 
SRO, would be subject to the requirements of the SRO's other 
rules.\261\
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    \260\ See proposed Rule 613(g)(4).
    \261\ See Sections 6(b)(6), 6(b)(7), and 6(d)(1) of the Exchange 
Act, 15 U.S.C. 78f(b)(6), 78f(b)(7), and 78f(d)(1). See also, e.g. 
FINRA Rule 9217, CHX Article 12, Nasdaq OMX BX Rule 9216 and IM-9216 
and NYSE Rule 476A.
---------------------------------------------------------------------------

    The Commission requests comment on these provisions regarding 
members' compliance with the proposed Rule and the NMS plan. Do 
commenters believe that these provisions would encourage members' 
compliance with the proposed Rule and the NMS Plan? If so, why? If not, 
what other provisions would be necessary or appropriate to promote 
compliance? What mechanisms should be part of a plan to promote 
compliance by members? Would it be appropriate to include violations of 
the proposed Rule, the NMS plan, or the SRO's rules implementing the 
NMS plan within existing SRO rules that impose minimum fines for 
violations of certain SRO rules? \262\ Would the exchanges or 
associations have to amend their rules to implement such a requirement? 
If so, how would they have to amend their rules? Are there other 
alternatives that would more effectively help ensure the accuracy and 
reliability of the information reported to the central repository by 
members? Would requiring the SROs to file their proposed rule changes 
to implement the requirements of the NMS plan with respect to the 
members within 120 days after approval of the proposed Rule provide 
sufficient time for SROs to draft the proposed rule changes? If not, 
why not?
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    \262\ See, e.g., FINRA Rule 9217 (providing for the imposition 
of fines in lieu of commencing a formal disciplinary proceeding for 
violations of certain rules, including the recording and reporting 
requirements of the OATS rules) and NYSE Rule 476A (providing for 
the imposition of fines in lieu of commencing a formal disciplinary 
proceeding for violations of certain rules, including the OTS 
rules).
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I. Operation and Administration of the NMS Plan

    The proposed Rule would require that the NMS plan include a 
governance structure to ensure fair representation of the plan 
sponsors.\263\ The rule as proposed gives flexibility to the SROs to 
devise a governance structure as they see fit. The proposed rule would 
require the NMS plan to include a provision addressing the percentage 
of votes required by the plan sponsors to effectuate amendments to the 
plan.\264\ For example, the plan sponsors could determine to provide 
each plan sponsor one vote on matters subject to a vote.\265\ Or, if 
there was a concern that this method would result in ``blocs'' of plan 
sponsors under common control exerting control in a one-sponsor, one-
vote system, the SROs could choose another alternative to ensure fair 
representation.
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    \263\ See proposed Rule 613(b)(1).
    \264\ See proposed Rule 613(b)(3).
    \265\ For example, Section 4.3 of the OPRA Plan provides that, 
except as otherwise provided, each of the members of the Management 
Committee shall be authorized to cast one vote for each Member that 
he or she represents on all matters voted upon by the Management 
Committee, and action of the Management Committee shall be 
authorized by the affirmative vote of a majority of the total number 
of votes the members of the Management Committee are authorized to 
cast, subject to the approval of the Commission whenever such 
approval is required under applicable provisions of the Exchange 
Act, and the rules of the Commission adopted thereunder. Action of 
the Management Committee authorized in accordance with the OPRA Plan 
shall be without prejudice to the rights of any Member to present 
contrary views to any regulatory body or in any other appropriate 
forum.
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    Further, most existing NMS plans require unanimous consent from the 
plan sponsors to effect an amendment.\266\ The Commission recognizes 
the unanimous consent requirement could be desirable because it helps 
to ensure that no plan sponsor is forced to comply with requirements 
with which it is unable to comply, or forced by the other sponsors to 
pay fees. However, a unanimous consent requirement also could allow one 
plan sponsor to effectively ``veto'' a provision desired by all other 
plan sponsors for competitive reasons, or permit one sponsor to lag 
behind in making updates to its systems or rules that would benefit the 
industry as a whole. The Commission proposes to allow the plan sponsors 
to determine whether to include in the NMS plan to be filed with the 
Commission a unanimity requirement for effectuating amendments to the 
plan, or some other convention.
---------------------------------------------------------------------------

    \266\ See, e.g., Securities Exchange Act Release Nos. 60405 
(July 30, 2009), 74 FR 39362 (August 6, 2009) (order approving the 
Options Order Protection and Locked/Crossed Market Plan) and 17638 
(March 18, 1981), 22 S.E.C. Docket 484 (March 31, 1981) (order 
approving the OPRA Plan).
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    The Commission also recognizes that the scope or purpose of the 
proposed NMS plan may differ from existing plans. The Commission 
requests comment on whether there are lessons from previous experience 
that suggest that the governance structure of the NMS plan to be filed 
with the Commission should differ from existing plans. The Commission 
requests comment on these provisions relating to the governance 
structure of the plan. Should the Commission require certain governance 
standards to ensure efficient

[[Page 32585]]

cooperation, or should the exchanges and association be allowed to 
create a governance structure of their own choosing? What are the 
relative merits of unanimity or super majority requirements? What are 
the relative merits of alternative voting mechanisms and other 
governance structures available to the plan sponsors? Should the voting 
mechanism vary by the type of decision or should different decision 
making bodies have authority over different types of decisions to avoid 
situations where no decision is made because the sponsors cannot agree? 
How should the governance and voting mechanisms be set up to avoid 
inefficient operations or paralysis? Should there be limits on the time 
frames given to make decisions? Should there be mechanisms to resolve 
impasses once a decision has taken a certain amount of time? The 
Commission also requests comment on whether the scope of the plan, 
including the requirements on broker-dealers members, and the 
expectation of improved surveillances for investor protection dictate 
that the governance structure should differ from existing plans. In 
particular, should the SRO sponsors be required to include in the 
governance structure and decision-making authority representatives of 
members to address member interests and independent representatives 
chosen specifically to address investor and other public interests?
    The proposed Rule also would require that the NMS plan include 
provisions to govern the administration of the central repository, 
including the selection of a plan processor. A ``plan processor'' is 
defined in Rule 600 of Regulation NMS to mean any SRO or securities 
information processor acting as an exclusive processor in connection 
with the development, implementation and/or operation of any facility 
contemplated by an effective national market system plan.\267\ The 
Commission expects that the plan sponsors would engage in a thorough 
analysis and formal competitive bidding process to choose the plan 
processor. As proposed, the plan sponsors would be required to select a 
person to act as the plan processor for the central repository no later 
than two months after the effectiveness of the national market system 
plan.\268\ The Commission preliminarily believes that this time frame 
would provide the plan sponsors with sufficient time to choose the plan 
processor, while providing that such entity would be in place with 
enough time to create and build the central repository to receive data 
from the SROs within one year after effectiveness of the NMS plan and 
from the members within two years after such effectiveness.
---------------------------------------------------------------------------

    \267\ See 17 CFR 242.600(55).
    \268\ See proposed Rule 613(a)(3)(i).
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    The Commission requests comment as to whether the proposed Rule 
should include specific requirements detailing the process for 
selection of a plan processor. Should the Commission require specific 
minimum requirements or standards that a plan processor should meet? If 
so, what requirement or standards would be necessary or appropriate? 
Should the plan processor be a non-SRO? Would this promote impartiality 
on the part of the plan processor? The Commission also requests comment 
on the proposed time frame to choose the plan processor. Is it too 
short? Too long? If so, why? Please be specific in your response.
    The proposed Rule also would require that the NMS plan contain a 
requirement that a Chief Compliance Officer (``CCO'') be appointed to 
regularly review the operation of the central repository.\269\ The CCO 
would be expected to establish reasonable procedures designed to make 
sure the operations of the central repository keep pace with technical 
developments. To the extent upgrades or other changes are necessary to 
assure the central repository's effectiveness, the CCO would be 
responsible for making recommendations for enhancements to the nature 
of the information collected and the manner in which it is processed.
---------------------------------------------------------------------------

    \269\ See proposed Rule 613(b)(5).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \270\ See proposed Rule 613(b)(2).
    \271\ See e.g. Section 7.1 of OPRA Plan.
---------------------------------------------------------------------------

    The Commission requests comment on whether the rule or plan should 
specify a method for allocating costs among the plan sponsors. The 
Commission also requests comment as to what provisions the exchanges 
and FINRA should include in the NMS plan relating to the admission of 
new plan sponsors and the withdrawal of existing plan sponsors. Should 
the Commission specify the process for the admission of new plan 
sponsors? What are the concerns, if any, that should be taken into 
account when providing for the admission of new plan sponsors? The 
Commission requests comment on all aspects of the proposed Rule 
relating to governance and administration of the NMS plan.

[[Page 32586]]

J. Proposed Implementation Schedule

    While the Commission preliminarily believes a comprehensive 
consolidated audit trail would be useful as soon as possible, the 
Commission also believes that it would be prudent to implement the Rule 
at a measured pace to ensure that all market participants are fully 
able to meet the requirements of the proposed Rule. Therefore, the 
proposed Rule would provide that the proposed data collection and 
submission requirements would first apply to national securities 
exchanges and national securities associations, but not to their 
individual members. As part of operating their businesses, the national 
securities exchanges and national securities associations are 
accustomed to handling large volumes of data and many already have in 
place electronic trading, routing and reporting systems.\272\ Further, 
under the proposal the exchanges would not be responsible for providing 
to the central repository, for each order, information relating to the 
customer. The Commission therefore preliminarily believes these systems 
could more readily and quickly be modified than the members' systems to 
comply with the requirements of the proposed Rule.
---------------------------------------------------------------------------

    \272\ For example, as part of COATS compliance, the options 
exchanges are required to have in place systems to electronically 
capture all order, transaction, and quotation information on the 
exchange.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \274\ See supra note 181.
    \275\ Dark pools are ATSs that do not provide their best-priced 
orders for inclusion in the consolidated quotation data. In general, 
dark pools offer trading services to institutional investors and 
others that seek to execute large trading interest in a manner that 
will minimize the movement of prices against the trading interest 
and thereby reduce trading costs. Dark pools fall within the 
statutory definition of an exchange, but are exempted if they comply 
with Regulation ATS. See Concept Release on Equity Market Structure, 
supra note 19, at 3599, and supra note 181.
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IV. Request for Comments

    We request and encourage any interested person to comment generally 
on the proposed Rule. In addition to the specific requests for comment 
throughout the release, the Commission requests general comment on all 
aspects of proposed Rule 613 of Regulation NMS. The Commission 
encourages commenters to provide information regarding the advantages 
and disadvantages of each aspect of the proposed Rule. The Commission 
invites commenters to provide views and data as to the costs and 
benefits associated with the proposed Rule. The Commission also seeks 
comment regarding other matters that may have an effect on the proposed 
Rule. We request comment from the point of view of national securities 
exchanges, national securities associations, members, investors, and 
other market participants. With regard to any comments, we note that 
such comments are of great assistance to our rulemaking initiative if 
accompanied by supporting data and analysis of the issues addressed in 
those comments.

V. Paperwork Reduction Act

    Certain provisions of the proposal contain ``collection of 
information requirements'' within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'') \276\ and the Commission has submitted 
them to the Office of Management and Budget (``OMB'') for review in 
accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid OMB 
control number. The title of the new collection of information is 
``Creation of a Consolidated Audit Trail Pursuant to Section 11A of the 
Securities Exchange Act of 1934 and Rules Thereunder.''
---------------------------------------------------------------------------

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

A. Summary of Collection of Information Under Proposed Rule 613

1. Creation and Filing of an NMS Plan
    As detailed above, the proposed Rule would require each national 
securities exchange and national securities association to jointly file 
with the Commission, on or before 90 days from approval of the proposed 
Rule, an NMS plan to govern the creation, implementation, and 
maintenance of a consolidated audit trail and central repository for 
the collection of information for NMS securities.\277\ The

[[Page 32587]]

NMS plan would be required to require each exchange or association and 
its respective members to provide certain data to the central 
repository in compliance with proposed Rule 613.\278\ The NMS plan also 
would need to include certain specified provisions related to 
administration and operation of the plan,\279\ and the operation of the 
central repository.\280\ Further, the NMS plan would be required to 
include certain provisions related to compliance by the exchanges and 
associations and their members with the requirement of the proposed 
Rule and the NMS plan.\281\
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    \277\ See proposed Rule 613(a)(1) and supra Section III.
    \278\ See proposed Rule 613(c) and supra Section III.D.
    \279\ For example, the NMS plan would be required to include 
provisions: (1) To ensure fair representation of the plan sponsors; 
(2) for administration of the central repository; (3) addressing the 
requirements for admission of new plan sponsors and withdrawal of 
existing plan sponsors; (4) addressing the percentage of votes 
required by the plan sponsors to effectuate amendments to the plan; 
(5) addressing the manner in which the costs of operating the 
central repository would be allocated among the national securities 
exchanges and national securities associations that are sponsors of 
the plan, including a provision addressing the manner in which costs 
would be allocated to new sponsors to the plan. See proposed Rule 
613(b).
    \280\ For example, the NMS plan would be required to include a 
provision requiring the creation and maintenance by the central 
repository of a method of access to the data, including search and 
reporting functions. See proposed Rule 613(e)(3). Additionally, the 
NMS plan would be required to include policies and procedures, 
including standards, to be used by the plan processor to: (1) Ensure 
the security and confidentiality of all information submitted to, 
and maintained by, the central repository; (2) ensure the 
timeliness, accuracy, and completeness of the data provided to the 
central repository; (3) require the rejection of data that does not 
meet validation parameters and the retransmission of corrected data; 
and (4) ensure the accuracy of the consolidation by the plan 
processor of the data provided to the central repository. See 
proposed Rule 613(e)(4).
    \281\ The NMS plan would be required to include: (1) A provision 
that by subscribing to and submitting the plan to the Commission, 
each national securities exchange and national securities 
association that is a sponsor to the plan agrees to enforce 
compliance by its members with the provisions of the plan; and (2) a 
mechanism to ensure compliance by the sponsors of the plan with the 
requirements of the plan. See proposed Rule 613(g)(3) and (h)(3).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

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.
---------------------------------------------------------------------------

    \283\ See proposed Rule 613(i).
---------------------------------------------------------------------------

3. Rule Filings by National Securities Exchanges and National 
Securities Associations
    Each national securities exchange and national securities 
association would be required to file with the Commission, pursuant to 
Section 19(b)(2) of the Exchange Act and Rule 19b-4 thereunder,\284\ a 
proposed rule change to require its members to comply with the 
requirements of the proposed Rule and the NMS plan submitted pursuant 
to the proposed Rule and approved by the Commission of which the 
national securities exchange or national securities association is a 
sponsor.\285\ The burden of filing such proposed rule change would 
already be included under the collection of information requirements 
contained in Rule 19b-4 under the Exchange Act.\286\
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    \284\ 15 U.S.C. 78s(b)(2) and 17 CFR 240.19b-4.
    \285\ See proposed Rule 613(g)(1).
    \286\ See Securities Exchange Act Release No. 50486 (October 5, 
2004), 69 FR 60287, 60293 (October 8, 2004) (File No. S7-18-04) 
(describing the collection of information requirements contained in 
Rule 19b-4 under the Exchange Act). The Commission has submitted 
revisions to the current collection of information titled ``Rule 
19b-4 Filings with Respect to Proposed Rule Changes by Self-
Regulatory Organizations'' (OMB Control No. 3235-0045). According to 
the last submitted revision concluded as of August 5, 2008, the 
current collection of information estimates 1,279 total annual Rule 
19b-4 filings with respect to proposed rule changes by self-
regulatory organizations.
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4. Collection and Retention of NBBO and Last Sale Data
    The central repository would be required to collect and retain on a 
current and continuing basis the national best bid and national best 
offer for each NMS security, transaction reports reported pursuant to a 
transaction reporting plan filed with the Commission pursuant to, and 
meeting the requirements of, Rule 601 of Regulation NMS, and last sale 
reports reported pursuant to the OPRA Plan.\287\ The central repository 
would be required to retain this information for a period of not less 
than five years.\288\
---------------------------------------------------------------------------

    \287\ See proposed Rule 613(e)(5); 17 CFR 242.601.
    \288\ See proposed Rule 613(e)(6).
---------------------------------------------------------------------------

5. Data Collection and Reporting
    The proposed Rule would require each national securities exchange, 
national securities association, and any member of such national 
securities exchange or national securities association to collect and 
electronically provide to the central repository details for each order 
and reportable event documenting the life of an order through the 
process of routing, modification, cancellation, and execution (in whole 
or in part).\289\ The proposed Rule would require the collection and 
reporting to the central repository of some information that national 
securities exchanges, national securities associations, and their 
members already are required to collect, and under certain 
circumstances, report to a third party, in compliance with existing 
Commission \290\ and SRO requirements.\291\ The proposed Rule

[[Page 32588]]

would, however, require exchanges, associations, and their members to 
report to the central repository information not required to be 
currently collected and reported pursuant to existing SRO audit trail 
rules.
---------------------------------------------------------------------------

    \289\ See proposed Rule 613(c)(1) and supra Section III.D.
    \290\ For example, Rule 17a-3 requires broker-dealers to 
maintain the following information that would be captured by the 
proposed Rule: Customer name and address; time an order was 
received; and price of execution. 17 CFR 240.17a-3. Also, Rule 17a-
25 requires brokers to maintain the following information with 
respect to customer orders: Date on which the transaction was 
executed; account number; identifying symbol assigned to the 
security; transaction price; the number of shares or option 
contracts traded and whether such transaction was a purchase, sale, 
or short sale, and if an option transaction, whether such was a call 
or put option; the clearing house number of such broker or dealer 
and the clearing house numbers of the brokers or dealers on the 
opposite side of the transaction; prime broker identifier; the 
customer's name and address; the customer's tax identification 
number; and other related account information. 17 CFR 240.17a-25. 
This information would be captured by the proposed Rule. See also 
Section 17(a) of the Exchange Act, 15 U.S.C. 78q(a), and Rules 17a-1 
and 17a-4 under the Exchange Act, 17 CFR 240.17a-1 and 17 CFR 
240.17a-4.
    \291\ The audit trail rules of several of the national 
securities exchanges and FINRA require the following information be 
recorded: Date order was originated or received by a member, 
security or option symbol, clearing member organization, order 
identifier, market participant symbol, number of shares executed, 
designation of order as short sale, limit order, market order, stop 
order or stop limit order, account type or number, date and time of 
execution, and execution price and size. See BOX Ch. V, Section 4; 
BX Rule 6955; FINRA Rule 7440; Nasdaq Options Market Chapter IX, 
Section 4; Nasdaq Rule 6955; NYSE Rule 132B; and NYSE Amex Equities 
Rule 132B. This information would be captured pursuant to the 
proposed Rule.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \292\ See supra Section I.A. (discussing Rule 17a-25 and the EBS 
system).
    \293\ See supra Section I.C. (discussing the requirements of 
FINRA's OATS).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \294\ See proposed Rule 613(e)(1). The Commission notes that a 
plan processor would be responsible for operating the central 
repository in compliance with the proposed Rule and the NMS plan.
    \295\ See proposed Rule 613(e)(6).
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B. Proposed Use of Information

1. Creation and Filing of NMS Plan
    As discussed in detail above, the NMS plan would govern the 
creation, implementation, and maintenance of a consolidated audit trail 
for NMS securities, which would aid the Commission and national 
securities exchanges and national securities associations in 
effectively and efficiently carrying out their regulatory 
responsibilities. The information that would be collected pursuant to 
the NMS plan would allow the SROs to more efficiently monitor trading 
activity in the securities markets, and would facilitate the Commission 
and the national securities exchanges and national securities 
associations' trading reconstruction efforts as well as enhance their 
monitoring, enforcement, and regulatory activities.
2. Report
    As the Commission states above in Section III.A., it ultimately 
intends for the proposed consolidated audit trail, if adopted, to be 
expanded to cover other securities, including equity securities that 
are not NMS securities, corporate bonds and other debt instruments; 
credit default swaps and other security-based swaps; and any other 
products that may come under the Commission's jurisdiction in the 
future. Further, the Commission preliminarily believes that it would be 
beneficial to expand the consolidated audit trail to include 
information on primary market transactions in NMS stocks and other 
equity securities that are not NMS stocks, as well as primary market 
transactions in debt securities. The Commission preliminarily believes 
that a timely expansion of the scope of the consolidated audit trail 
beyond NMS securities would be beneficial as illegal trading strategies 
that the consolidated audit trail would be designed to help detect and 
deter, such as insider trading, may involve trading in multiple related 
products other than NMS securities across multiple markets.
    To help ensure that such an expansion would occur in a reasonable 
time and that the systems and technology that would be used to 
implement the Rule as proposed are designed to be easily scalable, 
proposed Rule 613(i) would require that the NMS plan contain a 
provision requiring each national securities exchange and national 
securities association that is a sponsor of the plan to jointly provide 
to the Commission within two months after effectiveness of the NMS plan 
a document outlining how the sponsors would incorporate into the 
consolidated audit trail information with respect to: (1) Equity 
securities that are not NMS securities; (2) debt securities; and (3) 
primary market transactions in NMS stocks, equity securities that are 
not NMS securities, and debt securities. The sponsors specifically 
would be required to address, among other things, details for each 
order and reportable event that they would recommend requiring to be 
provided; which market participants would be required to provide the 
data; an implementation timeline; and a cost estimate. The Commission 
would be able to use the information contained in the report in its 
consideration and analysis of whether to expand the consolidated audit 
trail.
3. Collection and Retention of NBBO and Last Sale Data
    As discussed above, the requirement that the central repository 
collect and retain the NBBO and transaction data in an electronic 
format compatible with the order and event information collected 
pursuant to the proposed Rule is intended to allow SRO and Commission 
staff to easily search across order, NBBO, and transaction data bases. 
The Commission preliminarily believes that having the NBBO information 
in an electronic format compatible with the order audit trail 
information would be useful for SROs to enforce compliance with federal 
securities laws, rules and regulations.\296\ The Commission also 
preliminarily believes that requiring the central repository to collect 
and retain in its

[[Page 32589]]

database the transaction information in a format compatible with the 
order execution information would aid the SROs in being able to monitor 
for certain market manipulations.\297\
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    \296\ The NBBO is used by SROs and the Commission to evaluate 
members for compliance with numerous regulatory requirements, such 
as the duty of best execution or Rule 611 of Regulation NMS. See 
Rule 611 of Regulation NMS, 17 CFR 242.611. See also ISE Rule 1901, 
NYSE Arca 6.94, and Phlx Rule 1084. An SRO would be able to compare 
order execution information to the NBBO information on a more timely 
basis because the order and execution information would be available 
on a real time basis and all of the information would be available 
in a compatible format in the same database. The SROs also may enjoy 
economies of scale by adopting standard cross-market surveillance 
parameters for certain types of violations.
    \297\ See supra Section III.D.1.v. As discussed above, the 
proposed Rule would require that each report of the execution (in 
whole or in part) of an order sent to the central repository include 
a notation as to whether the execution was reported to the 
consolidated tape pursuant to an effective transaction reporting 
plan or the OPRA Plan. This requirement should allow regulators to 
more efficiently evaluate certain trading activity. For example, 
trading patterns of reported and unreported trades may cause the 
staff of an SRO or the Commission to make further inquiry into the 
nature of the trading to ensure that the public was receiving 
accurate and timely information regarding executions and that market 
participants were continuing to comply with the trade reporting 
obligations under SRO rules. Similarly, patterns in the reported and 
unreported transactions could be indicia of market abuse, including 
failure to obtain best execution for customer orders or possible 
market manipulation. Being able to more efficiently compare the 
consolidated order execution data with the trades reported to the 
consolidated tape could thus be an important component of overall 
surveillance activity.
---------------------------------------------------------------------------

4. Data Collection and Reporting
    As discussed above, the Commission preliminarily believes that the 
data collection and reporting requirements of the proposed Rule would 
enhance the ability of SRO staff to effectively monitor and surveil the 
securities markets and thus detect and investigate potentially illegal 
activity in a more timely fashion, whether on one market or across 
markets. Further, the Commission preliminarily believes that the 
ability to access such data would improve the ability of SRO staff to 
conduct timely and accurate trading analysis for market reconstructions 
and complex enforcement inquiries or investigations, as well as 
inspections and examinations. Further, the Commission preliminarily 
believes that the ability to access such data would aid the Commission 
staff in its regulatory and market analysis efforts.
5. Central Repository
    The central repository would be required to receive and retain the 
data required to be submitted by the national securities exchanges, 
national securities associations, and their members pursuant to the 
proposed Rule. SROs and Commission staff would then have access to the 
data for regulatory purposes, as discussed above.

C. Respondents

1. National Securities Exchanges and National Securities Associations
    Proposed Rule 613 would apply to all of the fourteen national 
securities exchanges and to one national securities association (FINRA) 
currently registered with the Commission.
2. Members of National Securities Exchanges and National Securities 
Associations
    Proposed Rule 613 would apply to the approximately 5,178 broker-
dealers that are currently registered with the Commission and are 
members of the national securities exchanges or FINRA.\298\
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    \298\ This is the number of broker-dealers filing FOCUS Reports 
at year-end 2008. FOCUS Reports are required to be filed by all 
registered broker-dealers, with a few exceptions. Excluded from this 
number were recently established broker-dealers that had yet to 
become active, or broker-dealers no longer doing business that had 
yet to deregister.
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D. Total Annual Reporting and Recordkeeping Burden

1. Burden on National Securities Exchanges and National Securities 
Associations
a. Creation and Filing of NMS Plan
    Proposed Rule 613 would require the national securities exchanges 
and FINRA to jointly file with the Commission a joint NMS plan to 
govern the creation, implementation, and maintenance of a consolidated 
audit trail and a central repository. The Commission estimates that it 
would take each national securities exchange and national securities 
association approximately 840 burden hours of internal legal, 
compliance, information technology, and business operations time to 
develop and file the NMS plan, including the required provisions 
regarding governance, administration, and operation of the plan.\299\
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    \299\ The Commission derived the total estimated burdens from 
the following estimates, which are based on the Commission's 
understanding of, and burden estimates for, existing NMS plans: 
(Attorney at 400 hours) + (Compliance Manager at 100 hours) + 
(Programmer Analyst at 220 hours) + (Business Analyst at 120 hours). 
The Commission preliminarily believes that the cost of developing 
and filing the NMS plan pursuant to the proposed Rule would be 
comparable to the cost to create other existing NMS plans, 
recognizing that the proposed Rule may include more detail as to 
what must be incorporated and addressed in the NMS plan implementing 
the proposed Rule.
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    The Commission preliminarily expects that national securities 
exchange and national securities association respondents may incur one-
time external costs for outsourced legal services to develop and draft 
the NMS plan. While the Commission recognizes that the amount of legal 
outsourcing used may vary from SRO to SRO, the staff estimates that on 
average, each national securities exchange and national securities 
association would outsource 50 hours of legal time to develop and draft 
the NMS plan, for a capital cost of approximately $20,000 for each 
national securities exchange and national securities association 
resulting from outsourced legal work.\300\ Therefore, the Commission 
preliminarily estimates that the average one-time initial burden of 
developing and filing the NMS plan would be 840 burden hours plus 
$20,000 external costs for outsourced legal counsel per SRO, for an 
aggregate estimated burden of 12,600 hours plus $300,000 external 
costs.
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    \300\ Based on industry sources, the Commission estimates that 
the hourly rate for outsourced legal services in the securities 
industry is $400 per hour.
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    Once the national securities exchanges and national securities 
associations have established the NMS plan, the Commission estimates 
that, on average, each national securities exchange and national 
securities association would incur 192 burden hours annually to ensure 
that the NMS plan is up to date and remains in compliance with the 
proposed Rule,\301\ for an aggregate estimated burden of 2,880 hours.
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    \301\ The Commission derived the total estimated burdens from 
the following estimates, which are based on prior Commission 
experience with burden estimates: (Attorney at 64 hours) + 
(Compliance Manager at 64 hours) + (Programmer Analyst at 64 hours) 
= 192 burden hours.
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b. Report
    The Commission estimates that it would take each national 
securities exchange or national securities association approximately 
420 burden hours of internal legal, compliance, business operations and 
information technology staff time to create the report required by the 
proposed Rule.\302\ The Commission also expects that each national 
securities exchange and national securities association respondent may 
incur one-time external costs for outsourced legal services helping to 
prepare the report. Commission estimates that on average, each national 
securities exchange and national securities association would outsource 
25 hours of legal time to create the report, for an aggregate one-time 
capital cost of approximately $10,000.\303\ Therefore, the Commission

[[Page 32590]]

preliminarily estimates that the one-time initial burden of drafting 
the report required by the proposed Rule would be 420 burden hours plus 
$10,000 external costs for outsourced legal counsel per SRO, for an 
aggregate estimated burden of 6,300 hours and $150,000 external costs.
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    \302\ The Commission derived the total estimated burden from the 
following estimates, which assumes preparation of the report would 
impose approximately half of the approximate burden of preparing the 
plan, reflects half of the approximate burden of drafting and filing 
the NMS plan, and the Commission's preliminary view that the cost of 
preparing the report would not be as extensive as the drafting and 
filing of the NMS plan: (Attorney at 200 hours) + (Compliance 
Manager at 50 hours) + (Programmer Analyst at 110 hours) + (Business 
Analyst at 60 hours) = 420 burden hours per SRO.
    \303\ The Commission derived the total estimated burden for 
outsourced legal counsel based on the assumption that the report 
required by the proposed Rule would require approximately half the 
effort of drafting and filing the proposed NMS plan.
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c. Data Collection and Reporting
    The proposed Rule would require the collection and reporting on a 
real time basis of some information that national securities exchanges 
and national securities associations already collect to operate their 
business, and are required to maintain in compliance with Section 17(a) 
of the Exchange Act and Rule 17a-1 thereunder.\304\ For instance, the 
Commission believes that exchanges keep records pursuant to Section 
17(a) of the Exchange Act and Rule 17a-1 thereunder in electronic form, 
of the receipt of all orders entered into their systems, as well as 
records of the routing, modification, cancellation, and execution of 
those orders. However, the proposed Rule would require each SRO to 
collect and report additional and more detailed information, and to 
report the information to the central repository in real time in a 
specified uniform format. The Commission anticipates that exchanges may 
need to enhance or replace their current systems to be able to comply 
with the proposed information collection and reporting requirements of 
the proposed Rule.
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    \304\ 15 U.S.C. 78q(a); 17 CFR 240.17a-1.
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    The Commission recognizes that the extent to which a particular SRO 
would need to make systems changes would differ depending upon the 
SRO's current market structure and existing systems. However, the 
Commission preliminarily estimates that, on average, the initial one-
time burden per national securities exchange and national securities 
association for development and implementation of the systems needed to 
capture the required information and transmit it to the central 
repository in a specified format in compliance with the proposed Rule 
to be 2,200 hours.\305\ Further, the Commission estimates that, on 
average, each exchange and association would incur approximately 40 
hours of outsourced legal counsel legal time for the development and 
implementation of systems needed to capture the required information 
and transmit it to the central repository, and a one-time software and 
hardware cost of $4,542,940 per SRO to develop and implement the 
necessary systems. Therefore, the Commission preliminarily estimates 
that the average one-time initial burden per national securities 
exchange and national securities association for development and 
implementation of the systems needed to capture the required 
information and transmit it to the central repository in a specified 
format in compliance with the proposed Rule would be 2,200 burden hours 
plus $16,000 costs for outsourced legal counsel and $4,542,940 for 
hardware and software costs,\306\ for an aggregate estimated burden of 
33,000 hours and $68,384,100 external and systems costs.
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    \305\ The Commission derived the total estimated burdens from 
the following estimates, which reflect the Commission's experience 
with, and burden estimates for, SRO systems changes, and discussions 
with market participants: (Attorney at 100 hours) + (Compliance 
Manager at 80 hours) + (Programmer Analyst at 1,960 hours) + 
(Business Analyst at 60 hours) = 2,200 burden hours per SRO.
    \306\ These estimates are based on the Commission's previous 
experience with, and cost estimates for, SRO systems changes, and 
discussions with market participants. See Securities Exchange Act 
Release No. 50870 (December 16, 2004), 69 FR 77424 (December 27, 
2004) (``Regulation NMS Reproposing Release'') at 77480 (discussing 
costs to implement Rule 611 of Regulation NMS). Although the 
Commission recognizes that the substance of Rule 611 of Regulation 
NMS is not the same as the proposed Rule, the Commission 
preliminarily believes that the scope of the systems changes would 
be comparable.
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    Once a national securities exchange or national securities 
association has established the appropriate systems required for 
collection and transmission of the required information to the central 
repository in a specified format, the Commission preliminarily believes 
that it would be necessary for each national securities exchange or 
national securities association to undertake efforts to ensure that 
their system technology is up to date and remains in compliance with 
the proposed Rule, which could include personnel time to monitor each 
SRO's reporting of the required data and the maintenance of the systems 
to report the required data; activity related to adding extra systems 
capacity to accommodate new order types that would need to be reported 
to the central repository; or implementing changes to trading systems 
which might result in additional reports to the central repository. The 
Commission preliminarily estimates that, on average, it would take a 
national securities exchange or national securities association 
approximately 4,975 hours per year to ensure that the system technology 
is up to date and remains in compliance with the proposed Rule.\307\ 
The Commission also estimates that it would cost, on average, 
approximately $1.25 million per year per SRO to continue to comply with 
the proposed requirements to provide information to the central 
repository, including costs to maintain the systems connectivity to the 
central repository and purchase any necessary hardware, software, and 
other materials.\308\ Therefore, the Commission preliminarily estimates 
that the average ongoing annual burden per SRO would be approximately 
4,975 hours plus $1.25 million external costs to maintain the systems 
necessary to collect and transmit information to the central 
repository, for an aggregate estimated annual burden of 74,625 hours 
and $18,750,000 external systems costs.
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    \307\ The Commission derived the total estimated burdens from 
the following estimates, which reflect the Commission's preliminary 
view that annual ongoing costs would be approximately half the costs 
of developing and implementing the systems to capture the required 
information and transmit it to the central repository, and 
discussions with market participants: (Attorney at 1,500 hours) + 
(Compliance Analyst at 1,600 hours) + (Programmer Analyst at 1,375 
hours) + (Business Analyst at 500 hours) = 4,975 burden hours per 
SRO.
    \308\ This estimate includes an estimated cost of approximately 
$10,000 per month to maintain systems connectivity to the central 
repository, including back-up connectivity. This estimate is based 
on discussions with a market participant.
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d. Central Repository
    The proposed Rule would require national securities exchanges and 
national securities associations to jointly establish a central 
repository tasked with the receipt, consolidation, and retention of the 
reported order and execution information. The central repository thus 
would need its own system(s) to receive, consolidate, and retain the 
electronic data received from the SROs and their members. The system 
would be required to be accessible by the sponsors and the Commission 
for regulatory purposes, with validation parameters allowing the 
central repository to automatically check the accuracy and completeness 
of the data submitted, and reject data not conforming to these 
parameters. It is anticipated that the burdens of development and 
operation of the central repository would be shared among the plan 
sponsors.
    The Commission staff preliminarily estimates that there would be an 
average initial one-time burden of 17,500 hours per plan sponsor for 
development and implementation of the systems needed to capture the 
required information in compliance with the proposed Rule.\309\

[[Page 32591]]

Further, the Commission estimates that each exchange and association 
would incur software and hardware costs of approximately $4 million per 
plan sponsor related to systems development. Therefore, the Commission 
preliminarily estimates a one-time initial burden of 17,500 hours per 
plan sponsor, plus software and hardware costs of approximately $4 
million related to systems development,\310\ for an aggregate estimated 
burden of 262,500 hours and $60 million in external systems costs.
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    \309\ The Commission derived the total estimated burdens based 
on the following estimates, which are based on information provided 
to the Commission regarding the development of reporting systems for 
the collection, consolidation, and dissemination of quotation and 
last sale data and discussions with market participants: (Attorney 
at 3,000 hours) + (Compliance Manager at 4,000 hours) + (Programmer 
Analyst at 7,500 hours) + (Business Analyst at 3,000 hours) = 17,500 
per SRO. This figure excludes the number of burden hours required to 
create and file the NMS plan.
    \310\ This cost estimate includes the estimated costs that each 
exchange and association would incur for software and hardware costs 
related to systems development. This cost estimate also would 
encompass (1) costs related to engaging in an analysis and formal 
bidding process to choose the plan processor, and (2) any search 
undertaken to hire a CCO. See proposed Rule 613(a)(3)(i) (the plan 
sponsors would be required to select a person to act as a plan 
processor for the central repository no later than two months after 
the effectiveness of the NMS plan) and 613(b)(5) (the plan sponsors 
would be required to appoint a CCO to regularly review the operation 
of the central repository to assure its continued effectiveness in 
light of market and technological developments, and make any 
appropriate recommendations for enhancements to the nature of the 
information collected and the manner in which the information is 
processed).
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    Once the plan sponsors have established the systems necessary for 
the central repository to receive, consolidate, and retain the required 
information, the Commission estimates that the burden per plan sponsor 
to ensure that the system technology and functionality is up to date 
and remains in compliance with the proposed Rule would be 192 hours per 
year, for an estimated aggregate burden per year of 2,880 hours.\311\ 
The estimated burden would include actions taken to regularly review 
the operation of the central repository to assure its continued 
effectiveness and to determine the need for enhancements to accommodate 
the information required to be collected, or new information collected, 
and the manner in which the data is processed, as well as periodic 
assessments of the adequacy of the system technology and functionality 
of the central repository.
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    \311\ The Commission derived the total estimated burdens from 
the following estimates, which are based on prior Commission 
experience with burden estimates: (Attorney at 16 hours) + 
(Compliance Manager at 16 hours) + (Programmer Analyst at 16 hours) 
= 48 burden hours per quarter, or 192 burden hours per year.
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    After the central repository systems have been developed and 
implemented, there would be ongoing costs for operating the central 
repository, including the cost of paying the CCO; the cost of systems 
and connectivity upgrades or changes necessary to receive, consolidate, 
and store the reported order and execution information from SROs and 
their members; the cost, including storage costs, of collecting and 
maintaining the NBBO and transaction data in a format compatible with 
the order and event information collected pursuant to the proposed 
Rule; the cost of monitoring the required validation parameters, which 
would allow the central repository to automatically check the accuracy 
and completeness of the data submitted and reject data not conforming 
to these parameters consistent with the requirements of the proposed 
Rule; and the cost of compensating the plan processor. The Commission 
preliminarily assumes that the plan processor would be responsible for 
the ongoing operations of the central repository. The Commission 
estimates that these costs would be approximately $100 million in 
external costs to the plan processor for operation of the central 
repository per year, or approximately $6,666,666 per plan sponsor per 
year.\312\
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    \312\ The Commission derived the total estimated burdens based 
on discussions with market participants. The estimated annual cost 
includes an annual salary for a CCO of $703,800. This figure is 
based on a $391 per-hour figure for a Chief Compliance Officer from 
SIFMA's Management & Professional Earnings in the Securities 
Industry 2008, modified by Commission staff to account for an 1,800-
hour work-year and multiplied by 5.35 to account for bonuses, firm 
size, employee benefits, and overhead.
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e. Collection and Retention of the NBBO and Transaction Reports
    The proposed Rule would require that the central repository collect 
and retain on a current and continuous basis the NBBO for each NMS 
security, transaction reports reported pursuant to an effective 
transaction reporting plan, and last sale reports reported pursuant to 
the OPRA Plan. The central repository would be required to maintain 
this NBBO and transaction data in a format compatible with the order 
and event information collected pursuant to the proposed Rule.\313\ 
Further, the central repository would be required to retain the 
information collected pursuant to paragraphs (c)(7) and (e)(5) of the 
proposed Rule in a convenient and usable standard electronic data 
format that is directly available and searchable electronically without 
any manual intervention for a period of not less than five years. The 
information would be required to be available immediately, or if 
immediate availability could not reasonably and practically be 
achieved, any search query would be required to begin operating on the 
data not later than one hour after the search query is made.\314\
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    \313\ See proposed Rule 613(e)(5).
    \314\ See proposed Rule 613(e)(6).
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    The Commission preliminarily has included in the burden estimates 
to the plan sponsors of developing and implementing the systems 
necessary to capture the order audit trail information (see supra 
Section V.D.1.d) the: (1) Initial one-time hour burden per plan sponsor 
for development and implementation of the systems at the central 
repository necessary to receive and retain this NBBO and last sale 
information; (2) associated software and hardware costs; and (3) 
ongoing costs of receiving and retaining the NBBO and last sale 
information.\315\
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    \315\ See supra Section V.D.1.d.
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    The Commission estimates that the ongoing external costs to receive 
the NBBO and last sale data from the SIPs would be approximately $1,370 
per year.\316\
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    \316\ The Commission derived this estimate based on the average 
current cost of obtaining consolidated quotation and transaction 
information from existing quotation and transaction reporting plans.
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2. Members
    The Commission preliminarily believes that the proposed Rule would 
require the collection and reporting in real time of much of the 
information that registered broker-dealers already maintain in 
compliance with existing regulations.\317\ For example, Section 17 of 
the Exchange Act and Rule 17a-3 thereunder mandate that broker-dealers 
keep certain records of orders handled during the course of 
business.\318\ Certain information also is required to be collected and 
reported by broker-dealers in compliance with a Commission request 
pursuant to Rule 17a-25 under

[[Page 32592]]

the Exchange Act.\319\ The proposed Rule would, however, require SRO 
members to collect and report additional information for each order in 
a specified uniform format. In addition to the new information, the 
members also would be required to report most of the information on a 
real time basis to the central repository, which is not currently 
required. The Commission anticipates that SRO members would need to 
either enhance or replace their current order handling, trading, and 
other systems to be able to collect and report the required order and 
reportable event information to the central repository as required by 
the proposed Rule.
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    \317\ See Section 17(a) of the Exchange Act, 14 U.S.C. 78q(a), 
and Rules 17a-3, 17a-4, and 17a-25 under the Exchange Act, 17 CFR 
240.17a-3, 17 CFR 240.17a-4, and 17 CFR 240.17a-25; see also, e.g., 
BATS Rule 20.7; BOX Chapter V, Section 4; CBOE Chapter VI, Rule 
6.24; CHX Article 11, Rule 3; FINRA Rule 7440; Nasdaq Options Market 
Chapter IX, Section 4; NYSE Rule 132B; and NYSE Amex Equities Rule 
132B.
    \318\ 15 U.S.C. 78q et seq.; 17 CFR 240.17a-3. Generally, 
broker-dealers must keep a memorandum of each brokerage order, 
including the following information: The terms and conditions of an 
order or instructions; the account for which an order was entered; 
time of order entry and receipt and, to the extent feasible, time of 
execution; any modifications or cancellations (and, to the extent 
feasible, time of cancellation); execution price; and the identity 
of each associated person, if any, responsible for the account. See 
Rule 17a-3(a)(6)(i) under the Exchange Act, 17 CFR 240.17a-
3(a)(6)(i). Broker-dealers also are required to keep a record for 
each cash and margin account they hold, and the name and address of 
the beneficial owner of each such account. See Rule 17a-3(a)(9) 
under the Exchange Act, 17 CFR 240.17a-3(a)(9).
    \319\ See supra Section I.A for a detailed discussion of what 
information is required to be submitted upon request to the 
Commission pursuant to Rule 17a-25 under the Exchange Act, 17 CFR 
240.17a-25.
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    The Commission recognizes that the extent to which a particular 
member would need to make systems changes or replace existing systems 
would differ depending upon the member's current business operations 
and systems. The Commission preliminarily believes that members that 
rely mostly on their own internal order routing and execution 
management systems would need to make changes to or replace such 
systems to collect and report the required order and reportable event 
information to the central repository as required by the proposed Rule. 
The Commission estimates that there are approximately 1,114 of these 
types of members.\320\ The Commission preliminarily estimates the 
average initial one-time burden to develop and implement the needed 
systems changes to capture the required information and transmit it to 
the central repository in compliance with the proposed Rule for these 
members would be approximately 6,530 burden hours.\321\ The Commission 
also preliminarily estimates that these members would, on average, 
incur approximately $1.5 million in one-time external costs for 
hardware and software to implement the systems changes needed to 
capture the required information and transmit it to the central 
repository.\322\ Therefore, the Commission preliminarily estimates that 
the average one-time initial burden per member would be 6,530 hours and 
$1.5 million, for an estimated aggregate burden of 7,274,420 hours and 
$1,671,000,000.
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    \320\ This number includes members that are clearing broker-
dealers that carry customer accounts; broker-dealers that accept 
customer monies but do no margin business; introducing brokers that 
clear proprietary securities transactions; ATSs registered with the 
Commission; other clearing firms; and registered market makers. This 
number was derived from annual FOCUS reports filed with the 
Commission for the year ending in 2008.
    \321\ The Commission derived the total estimated burdens on the 
following estimates, which reflect the Commission's previous 
experience with, and burden estimates for, broker-dealer systems 
changes, and discussions with market participants: (Attorney at 
1,240 hours) + (Compliance Manager at 1,540 hours) + (Programmer 
Analyst at 2,750 hours) + (Business Analyst at 1,000 hours) = 6,530 
hours.
    \322\ These estimates are based on the Commission's previous 
experience with, and cost estimates for, broker-dealer systems 
changes, and discussions with market participants. See Regulation 
NMS Reproposing Release, supra note 306, at 77480 (discussing costs 
to implement Rule 611 of Regulation NMS). Although the Commission 
recognizes that the substance of Rule 611 of Regulation NMS is not 
the same as the proposed Rule, the Commission preliminarily believes 
that the scope of the systems changes would be comparable.
    These estimated hour burdens and systems costs would include the 
burden and costs, if any, that would be incurred by members to 
obtain the required customer information, including beneficial 
ownership, store it electronically, and transmit it to the central 
repository.
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    This number would likely overestimate the costs for some of these 
members and underestimate it for others. For example, it may 
overestimate the cost for ATSs as opposed to members that engage in a 
customer and proprietary (or market marking) business, in part because 
of the narrower business focus of some ATSs.\323\ The Commission also 
recognizes that some or all of these members may contract with one or 
more outside vendors to provide certain front-end order management 
systems. The third-party vendor may make changes to its systems to 
permit the members that use the system to capture and provide the 
required information to the central repository. Likewise, some or all 
of these members may contract with outside vendors to provide back-
office functionality. These third-party vendors may make changes to 
their systems to permit the members that use the systems to capture and 
provide the required information to the central repository. The cost of 
these changes may be shared by the various members that use the 
systems, and thus may result in a reduced cost to an individual member 
to implement changes to its own systems to comply with the requirements 
of the proposed Rule.
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    \323\ See Regulation NMS Reproposing Release, supra note 306, at 
77480.
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    Once such a member has established the appropriate systems and 
processes required for collection and transmission of the required 
information to the central repository, the Commission estimates that 
the proposal would impose on each member ongoing annual burdens 
associated with, among other things, personnel time to monitor each 
member's reporting of the required data and the maintenance of the 
systems to report the required data; activity related to adding extra 
systems capacity to accommodate new order types that would need to be 
reported to the central repository; or implementing changes to trading 
systems which might result in additional reports to the central 
repository. The Commission preliminarily estimates that, on average, it 
would take a member of a national securities exchange or national 
securities association approximately 3,050 burden hours per year 
continued compliance with the proposed Rule.\324\ The Commission also 
estimates that it would cost, on average, approximately $756,000 per 
year per member to maintain the systems connectivity to the central 
repository and purchase any necessary hardware, software, and other 
materials.\325\ Therefore, the Commission preliminarily estimates that 
the average ongoing annual burden per member would be approximately 
3,050 hours, plus $756,000 external costs to maintain the systems 
necessary to collect and transmit information to the central 
repository, for an estimated aggregate annual burden of 3,397,700 hours 
and $842,184,000.
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    \324\ The Commission derived the total estimated burdens on the 
following estimates, which reflect the Commission's preliminary view 
that ongoing costs would be approximately half of the costs of 
developing and implementing the systems to comply with the proposed 
Rule: (Attorney at 800 hours) + (Compliance Manager at 1,000 hours) 
+ (Programmer Analyst at 500 hours) + (Business Analyst at 750 
hours) = 3,050 burden hours.
    \325\ This estimate includes an estimated cost of approximately 
$10,000 per month to maintain systems connectivity to the central 
repository, including back-up connectivity. This estimate is based 
on discussions with a market participant.
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    The Commission preliminarily believes that other members generally 
would rely on functionality provided by third parties to electronically 
capture the required information and transmit it to the central 
repository in real time. For purposes of the proposed Rule, the 
Commission assumes that these members, which could include broker-
dealers defined as ``small entities'' for purposes of the Regulatory 
Flexibility Act,\326\ generally do not clear transactions and may not 
possess their own internal order routing and execution management 
systems, but instead rely on third-party providers for such 
functionality. Further, the Commission assumes that many of these 
members currently do not themselves report order or trade information 
and instead rely on their clearing firms or other third parties to do 
it for them.

[[Page 32593]]

These smaller members may look for ``turn key'' systems that could 
provide the functionality required by the proposed Rule. As such, the 
Commission preliminarily believes that these members would not 
undertake a fundamental restructuring of their business to comply with 
the proposed Rule. Instead, they might continue to rely on their 
clearing broker-dealer, or they might purchase a standardized software 
product provided by a third party that would provide the functionality 
to electronically capture the required information and transmit it to 
the central repository in real time. The Commission estimates that 
there are approximately 3,006 of these types of members.\327\ For these 
members, Commission staff preliminarily estimates the average external 
cost to compensate a third party, whether the clearing broker-dealer or 
other third party, for software that would provide the necessary 
functionality to electronically capture the required information and 
transmit it to the central repository, would be approximately $50,000 
per member.\328\ In addition, the Commission preliminarily estimates 
that each of these members, on average, would incur a one-time burden 
of 140 hours to incorporate this functionality.\329\ Therefore, the 
Commission preliminarily estimates an initial aggregate burden of 
420,840 hours and $150,300,000.
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    \326\ See infra Section IX.
    \327\ This number includes introducing broker-dealers that do 
not clear transactions. This number excludes non-clearing firms that 
specialize in direct participation programs; non-clearing firms that 
sell insurance products; and non-clearing firms that are 
underwriters and retailers of mutual funds because these firms do 
not deal in NMS securities. This number was derived from annual 
FOCUS reports filed with the Commission for the year ending in 2008.
    \328\ This estimate is based on the Commission's previous 
experience with, and burden estimates for, broker-dealer systems 
changes. See Regulation NMS Reproposing Release, supra note 306, at 
77480 (discussing costs to implement Rule 611 of Regulation NMS). 
Although the Commission recognizes that the substance of Rule 611 of 
Regulation NMS is not the same as the proposed Rule, the Commission 
preliminarily believes that the scope of the systems changes would 
be comparable.
    \329\ The Commission derived the estimated burdens from the 
following estimates, which are based on prior Commission experience 
with burden estimates: (Attorney at 50 hours) + (Compliance Manager 
at 50 hours) + (Programmer Analyst at 40 hours) = 140 hours.
    These estimated hour burdens and systems costs would include the 
burden and costs, if any, that would be incurred by members to 
obtain the required customer information, including beneficial 
ownership, store it electronically, and transmit it to the central 
repository.
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    Once such a member has procured the appropriate third party 
system(s) for collection and transmission of the required information 
to the central repository, the Commission preliminarily estimates that 
such a member would continue to incur, on average, an external cost of 
$50,000 annually to compensate a third party, whether the clearing 
broker-dealer or for software that would provide the necessary 
functionality to capture the required information and transmit it to 
the central repository. The Commission also preliminarily estimates 
that each such member would incur a cost for compliance personnel 
necessary to oversee continued compliance with the proposed Rule, which 
would result in 64 burden hours annually for such member.\330\ 
Therefore, the Commission preliminarily estimates an aggregate ongoing 
burden of 192,384 hours and $150,300,000 to ensure compliance with the 
proposed Rule.
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    \330\ The Commission bases this estimate one a full-time 
Compliance Manager spending approximately 2 days per quarter of his 
time on overseeing ongoing compliance with the proposed Rule.
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    The Commission requests specific comments on each of its estimates 
with respect to the estimated burden and costs on members to comply 
with the proposed Rule. In particular, the Commission requests comment 
on the specific types and amount of costs, as well as internal staff 
burden, that would be incurred to modify members' order handling, 
trading, and other systems to comply with the proposed Rule. The 
Commission requests comment whether, and if so how, the estimated costs 
would be impacted if the members did not have to provide the 
information in proposed Rule 613(c)(7)(vi) and (vii) (the non-real time 
information).\331\ For instance, would requiring the reporting to the 
central repository of the account numbers for any subaccounts to which 
an execution is allocated, and the amount of a commission, if any, paid 
by the customer and the unique identifier of the broker-dealer(s) to 
whom the commission is paid, require changes to systems other than 
order handling and execution systems?
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    \331\ Proposed Rule 613(c)(7)(vi) would require the reporting to 
the central repository of the following information: (1) The account 
number for any subaccounts to which the execution is allocated (in 
whole or part); (2) the unique identifier of the clearing broker or 
prime broker, if applicable; (3) the unique order identifier of any 
contra-side order(s); (4) special settlement terms, if applicable; 
(5) short sale borrow information and identifier; and (6) the amount 
of a commission, if any, paid by the customer, and the unique 
identifier of the broker-dealer(s) to whom the commission is paid. 
Proposed Rule 613(c)(7)(vii) would require the reporting to the 
central repository of a cancelled trade indicator, if the trade is 
cancelled.
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E. Collection of Information Is Mandatory

    Each collection of information discussed above would be a mandatory 
collection of information.

F. Confidentiality

    The proposed Rule would require that the information to be 
collected and electronically provided to the central repository would 
only be available to the national securities exchanges, national 
securities association and the Commission for the purpose of performing 
their respective regulatory and oversight responsibilities pursuant to 
the federal securities laws, rules, and regulations.\332\ Further, the 
national market system plan submitted pursuant to the proposed Rule 
would be required to include policies and procedures to ensure the 
security and confidentiality of all information submitted to the 
central repository, and to ensure that all plan sponsors and their 
employees, as well as all employees of the central repository, shall 
use appropriate safeguards to ensure the confidentiality of such data 
and shall agree not to use such data for any purpose other than 
surveillance and regulatory purposes.\333\
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    \332\ See proposed Rule 613(e)(2).
    \333\ See proposed Rule 613(e)(4)(i).
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G. Retention Period of Recordkeeping Requirements

    National securities exchanges and national securities associations 
would be required to retain records and information pursuant to Rule 
17a-1 under the Exchange Act.\334\ Members would be required to retain 
records and information in accordance with Rule 17a-4 under the 
Exchange Act.\335\
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    \334\ 17 CFR 240.17a-1.
    \335\ 17 CFR 240.17a-4.
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H. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comment to: (1) Evaluate whether each proposed collection of 
information is necessary for the performance of the functions of the 
agency, including whether the information shall have practical utility; 
(2) evaluate the accuracy of the agency's estimate of the burden of 
each proposed collection of information; (3) enhance the quality, 
utility, and clarity of the information to be collected; and (4) 
minimize the burden of each collection of information on those who are 
to respond, including through the use of automated collection 
techniques or other forms of information technology.

[[Page 32594]]

VI. Consideration of Costs and Benefits

    The Commission is sensitive to the anticipated costs and benefits 
of the proposed Rule and requests comments on the costs and benefits of 
the proposed Rule. The Commission encourages commenters to identify, 
discuss, analyze, and supply relevant data regarding any such costs or 
benefits.

A. Benefits

    Proposed Rule 613 would require all national securities exchanges 
and national securities associations to jointly submit to the 
Commission an NMS plan to create, implement, and maintain a 
consolidated audit trail. The proposed consolidated audit trail would 
capture, in real time, certain information about each order (including 
quotations) for an NMS security, including the identity of the customer 
placing the order, and the details of routing, modification, 
cancellation, and execution (in whole or in part). In effect, an 
``electronic audit trail report'' would be created for every event in 
the life of the order. The consolidated audit trail would be maintained 
by a central repository, and all exchanges, FINRA and the Commission 
would have access to the consolidated audit trail data for regulatory 
purposes.
    The Commission preliminarily believes that proposed Rule 613 would 
significantly aid each of the exchanges and FINRA in carrying out its 
respective statutory obligations to be organized and have the capacity 
to comply, and enforce compliance by its members, with its rules, and 
with the federal securities laws, rules, and regulations. Likewise, the 
Commission believes that proposed Rule 613 would significantly aid the 
Commission in its ability to oversee the exchanges and associations, 
and to enforce compliance by the members of exchanges and associations 
with the respective exchange's or association's rules, and the federal 
securities laws and regulations. The proposed consolidated audit trail 
also would aid the Commission in its efforts to limit the manipulation 
of security prices, and to limit the use of manipulative or deceptive 
devices in the purchase or sale of a security. Further, the proposal 
would benefit exchanges, FINRA, and Commission staff by improving the 
ability of exchanges, FINRA and Commission staff to conduct more timely 
and accurate trading analysis for market reconstructions, complex 
enforcement inquiries or investigations, as well as inspections and 
examinations.
    Specifically, the Commission preliminarily believes that, as 
proposed, Rule 613 would enable exchanges and FINRA to more effectively 
and efficiently detect, investigate, and deter illegal trading 
activity, particularly cross-market illegal activity, in furtherance of 
their statutory obligations. In addition, the Commission preliminarily 
believes that proposed Rule 613 would enhance the ability of the 
Commission staff in its regulatory and market analysis efforts. The 
proposed rule would achieve these objectives in several ways. First, 
proposed Rule 613 would require the central repository to collect the 
same data on customer and order event information from each exchange, 
FINRA, and all members of the exchanges and FINRA, in a uniform format. 
Currently, the scope and format of audit trail information relating to 
orders and executions differs, sometimes significantly, among exchanges 
and FINRA. Thus, by requiring that all exchanges, FINRA and their 
members submit uniform customer and order event data to the central 
repository in a uniform format that would more readily allow for 
consolidation, the proposed Rule would allow regulators to more easily, 
and in a more timely manner, surveil potential manipulative activity 
across markets and market participants. The Commission preliminarily 
believes that this increased efficiency would enhance the ability of 
SRO and Commission staff to detect and investigate manipulative 
activity in a more timely manner, whether the activity is occurring on 
one market or across markets (or across different product classes). 
Timely pursuit of potential violations can be important in, among other 
things, seeking to freeze and recover any profits received from illegal 
activity.
    The Commission also preliminarily believes that the proposed 
consolidated audit trail would enhance the ability of SRO and 
Commission staff to regulate the trading of NMS securities by requiring 
that key pieces of information currently not captured in existing audit 
trails be reported to the proposed consolidated audit trail. For 
example, proposed Rule 613 would require that the customer that submits 
or originates an order be identified in the consolidated audit trail. 
In addition, the proposed Rule would require the assignment of unique 
identifiers for each order, each customer, and each broker-dealer and 
SRO that handles an order. Further, the proposed Rule would greatly 
enhance the ability to track an order from the time of order inception 
through routing, modification, cancellation, and execution. The 
Commission preliminarily believes that this information would allow 
regulators to more easily track potential manipulative activity across 
markets and market participants, and would place SRO and Commission 
staff in a better position to surveil whether exchange rules, as well 
as federal securities laws, rules and regulations, are complied with.
    The proposal also would require that most of the required audit 
trail information be submitted on a real time basis. Most existing 
audit trails currently collect information on orders at the end of the 
day, or upon request, rather than in real time.\336\ Other order and 
execution information, such as EBS data and Rule 17a-25 data, is 
provided to the Commission only upon request. The proposed consolidated 
audit trail would require that certain information about orders and 
executions be provided on a real time basis. The Commission 
preliminarily believes that this requirement could significantly 
increase the ability of SRO and Commission staff to identify and 
investigate manipulative activity in a more timely manner.\337\
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    \336\ See supra Sections I.C., I.D., II.A., and V.A.5.
    \337\ See supra Section III.D.1.
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    The Commission preliminarily believes that the proposal also would 
benefit exchanges, FINRA, and Commission staff by improving the ability 
of exchanges, FINRA and Commission staff to conduct timely and accurate 
trading analysis for market reconstructions, complex enforcement 
inquiries or investigations, as well as inspections and examinations. 
Today, trading activity is widely dispersed among various market 
centers, and one or more related orders for one or more securities or 
other related products may be routed to multiple broker-dealers and 
more than one exchange, or be executed in the OTC market. Thus, SRO and 
Commission regulatory staff investigating potentially illegal behavior 
may have to collect information from multiple broker-dealers and then 
examine, analyze and reconcile the disparate information provided in 
widely divergent formats to accurately reconstruct all trading activity 
during a particular time frame in the course of investigating 
potentially manipulative activity. Obtaining the necessary order and 
execution information and undergoing the necessary analysis to 
determine whether any wrongdoing exists based on the information 
available today requires substantial investment of time and effort on 
behalf

[[Page 32595]]

of regulatory authorities. Under proposed Rule 613, regulatory 
authorities would be able to access all information about events in the 
life of an order or related orders, and obtain critical information 
identifying the customer (or beneficial owner) behind the order(s) 
directly from the central repository in a uniform format. Thus, the 
Commission preliminarily believes that ability of SRO and Commission 
staff to conduct timely and accurate trading analysis for market 
reconstructions, complex enforcement inquiries and investigation, as 
well as inspections and examinations, would be significantly improved.
    The Commission also preliminarily believes that the proposal would 
benefit SROs, as well as the NMS for NMS securities, by ultimately 
reducing some regulatory costs, which may result in a more effective 
re-allocation of overall costs. For example, by providing a more 
comprehensive and searchable database, the Commission preliminarily 
believes that the consolidated audit trail would significantly decrease 
the amount of time invested by SRO staff to determine whether any 
illegal activity is occurring either on one market or across markets. 
Currently, SRO regulatory staff may need to submit multiple requests to 
its members during the course of an investigation into possible illegal 
activity, or submit multiple requests to ISG to obtain audit trail 
information from other SROs about trading in a particular security, and 
then commit significant staff time to collating and analyzing the data 
produced. The proposal would benefit the Commission in similar 
respects. For example, Commission staff often must submit numerous 
requests to members after the Commission receives information from 
equity cleared reports in an attempt to identify the ultimate customer 
(or beneficial account holder) that entered the order or orders in 
question. Substantial Commission staff resources currently are invested 
in analyzing the data that is received in response to these requests.
    Under proposed Rule 613, SRO regulatory staff would have immediate, 
easily searchable access to the consolidated audit trail data through 
the central repository for purposes of conducting surveillance, 
investigations, and enforcement activities. Commission staff likewise 
would have more efficient and timely access for purposes of conducting 
risk assessments of referrals received, investigations, and enforcement 
activities, and for purposes of conducting market reconstructions or 
other analysis. Thus, the Commission preliminarily believes that the 
proposal would benefit SRO and Commission staff, as well as the market 
for NMS securities as whole, by providing immediately accessible audit 
trail information to regulatory staff, which would in turn reduce staff 
time and effort that would otherwise be needed to collect and analyze 
audit trail information and allow such staff time and effort to be 
redirected to more effective uses, possibly even allowing the staff to 
engage in more investigations. In other words, if the costs per 
investigation decreased because of efficiencies in the proposed 
consolidated audit trail information, SRO or Commission staff may be 
able to review and investigate a greater amount of suspicious activity.
    Likewise, the Commission preliminarily believes that proposed Rule 
613 would benefit the exchanges, FINRA, the Commission, and the members 
of SROs, as well as investors and the public interest, by reallocating 
the overall cost of regulating the markets for NMS securities on an 
ongoing basis toward more efficient regulation. For instance, the 
Commission preliminarily believes that the proposed consolidated audit 
trail would eliminate the need for certain SRO and Commission rules 
that currently mandate the collection and provision of information, at 
least with respect to NMS securities. As noted above, many exchanges 
and FINRA each have their own disparate audit trail rules. Thus, a 
member of the various exchanges and FINRA could be subject to the audit 
trail rules of, and be required to submit different information to, 
more than one exchange and FINRA. The Commission intends that the 
proposed consolidated audit trail replace the need to have disparate 
SRO audit trail rules. If proposed Rule 613 were adopted, and the 
consolidated audit trail was implemented, the Commission preliminarily 
believes that the exchanges and FINRA would not need to have separate 
and disparate audit trail rules that apply to NMS securities applicable 
to their members. Thus, the Commission preliminarily believes that the 
proposed consolidated audit trail would ultimately result in the 
ability of SROs to repeal their existing audit trail rules because SRO 
audit trail requirements would be encompassed within proposed Rule 613. 
Similarly, the proposed consolidated audit trail also may render 
duplicative and thus unnecessary certain data obtained from the EBS 
system pursuant to Rule 17a-25 (and the SRO rules implementing the EBS 
system), and from the equity cleared data, at least as it relates to 
NMS securities. SRO and Commission staff instead would be able to 
access the audit trail information for every order directly from the 
central repository.\338\
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    \338\ The Commission notes that, if the proposed Rule were 
adopted, the SROs would need to consider the continued need for 
their existing audit trail rules until such time that their members 
begin complying with the requirements of the proposed Rule.
---------------------------------------------------------------------------

    The Commission requests comment on any ongoing cost savings to SROs 
or their members that could be achieved by the proposal. Are there any 
other systems or technologies that could be replaced by the proposed 
audit trail? Would additional Commission action be required to achieve 
cost savings due to redundant rules or systems? Are there any new 
systems or technology requirements that could offset these potential 
cost savings? To what extent would any cost savings amount to a 
reallocation of resources towards more effective or efficient uses? 
Please provide specific examples. The Commission also requests comment 
as to whether the proposed Rule should require the NMS plan to include 
provisions relating to transition from the existing audit trails to the 
proposed consolidated audit trail.
    As discussed above, the Commission preliminarily believes that the 
proposal would significantly enhance the ability of SRO staff to 
efficiently and effectively regulate their market and their members, 
including detecting and investigating potential manipulative activity. 
The Commission also preliminarily believes that the proposed 
consolidated audit trail would benefit the Commission in its regulatory 
and market analysis efforts. More timely detection and investigation of 
potential manipulative activity may lead to greater deterrence of 
future illegal activity if potential wrongdoers perceive a greater 
chance of regulators identifying their activity in a more timely 
fashion. To the extent investors consider the improvement in 
regulators' ability to detect and investigate wrongdoing as significant 
to their investment decisions, investor trust, which is a component of 
investor confidence, is improved and investors may be more willing to 
invest in the securities markets.\339\ An increase in investor 
participation in the securities markets, at least to the extent that 
the increase is allocated efficiently, can potentially benefit the 
securities markets as a whole, through better capital formation. Thus, 
the Commission preliminarily believes that the proposed consolidated 
audit trail

[[Page 32596]]

would benefit the NMS for NMS securities by encouraging more efficient 
and potentially a higher level of capital investment.
---------------------------------------------------------------------------

    \339\ See Guiso, Sapienza, and Zingales, ``Trusting the Stock 
Market,'' available at http://ssrn.acom/abstract=811545.
---------------------------------------------------------------------------

    The Commission requests comment on how the proposal would impact 
investor protections and investor confidence. In particular, would the 
consolidated audit trail better align investor protections to the 
expectations that investors have about their protections? What would be 
the economic effect of the potential changes to investor protections or 
to better alignment of those protections with investor expectations? 
Would any of the anticipated benefits of the proposed Rule be mitigated 
if market participants alter their trading behavior, such as by 
shifting their trading activity to products or markets that do not 
require the capture of customer information to avoid compliance with 
the requirements of the proposed Rule? If so, please explain how so, 
and what, if any, steps the Commission should take in response.
    The Commission also preliminarily believes that proposed Rule 613 
would enhance the overall reliability of audit trail data that is 
available to the Commission and SRO regulatory staff. Because the 
proposed Rule would require that the NMS plan include policies and 
procedures, including standards, to be used by the plan processor to 
ensure the timeliness, accuracy, and completeness of the audit data 
submitted to the central repository, there would be an automatic check 
on the incoming audit trail data submitted by exchanges and FINRA, and 
their members, for reliability and accuracy. The Commission expects 
that these policies and procedures would include validation parameters 
that would need to be met before audit trail data would be accepted 
into the central repository, and that the central repository would 
reject data that did not meet certain validation parameters, and 
require resubmission of corrected data. Thus, the Commission 
preliminarily believes that the integrity of audit trail information 
available to the Commission and to the regulatory staff of the 
exchanges and FINRA would be enhanced and safeguarded by the provisions 
applicable to the central repository pursuant to proposed Rule 613.

B. Costs

    As discussed below, the Commission acknowledges that there likely 
would be significant up-front costs to implement the proposal. However, 
the Commission preliminarily believes that SRO and Commission staff, as 
well as SRO members, would realize other cost savings and benefits.
1. Creation and Filing of NMS Plan
    The proposed Rule would require the exchanges and FINRA to jointly 
develop and file an NMS plan to create, implement and maintain a 
consolidated audit trail that would capture customer and order event 
information in real time for all orders in NMS securities, across all 
markets, from the time of order inception through execution, 
cancellation or modification.\340\ Exchanges and FINRA would be 
expected to undertake any joint action necessary to develop and file 
the NMS plan, and there would be attendant costs in doing so. For 
example, the Commission anticipates that exchange and FINRA staff would 
need to meet and draft the required terms and provisions of the NMS 
plan.\341\ The Commission preliminarily believes that the existing 
exchanges and FINRA would incur an aggregate one-time cost of 
approximately $3,503,100 to prepare and file the NMS plan.\342\ Once 
exchanges and FINRA have established the NMS plan, the Commission 
estimates that, on average, each exchange and FINRA would incur a cost 
of $48,384 per year to ensure that the plan is up to date and remains 
in compliance with the proposed Rule,\343\ for an estimated aggregate 
annual cost of $725,760.
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    \340\ See proposed Rule 613(c)(1), (c)(3), (c)(7); see also 
supra Sections III.A., III.B., III.D., and V.A.5.
    \341\ As discussed above in Section III, these required 
provisions include provisions relating to: A governance structure to 
ensure the fair representation of the plan sponsors; administration 
of the plan, including the selection of the plan processor; the 
admission of new sponsors of the NMS plan and the withdrawal of 
existing sponsors from the plan; the percentage of votes required by 
the plan sponsors to effectuate amendments to the plan; the manner 
in which costs of operating the central repository would be 
allocated among the exchanges and FINRA, including a provision 
addressing the manner in which costs would be allocated to new 
sponsors of the plan; the appointment of a Chief Compliance Officer; 
the provision stating that by subscribing to and submitting the plan 
to the Commission each plan sponsor agrees to enforce compliance by 
its members with the provisions of the plan; and the provision 
requiring the creation and maintenance by the central repository of 
a method of access to the consolidated data that includes search and 
reporting functions. See proposed Rules 613(b), 613(e)(3), and 
613(g)(3). The NMS plan also would be required to include policies 
and procedures, including standards, to be used by the plan 
processor to ensure the security and confidentiality of all 
information submitted to the central repository; to ensure the 
timeliness, accuracy, and completeness of the data provided to the 
central repository; to require the rejection of data provided to the 
central repository that does not meet the validation parameters set 
out in the plan and the re-transmission of corrected data; and to 
ensure the accuracy of the processing of the data provided to the 
central repository. See proposed Rule 613(e)(4).
    \342\ This figure includes internal personnel time and external 
legal costs. Commission staff estimates that each exchange and 
association would expend (400 Attorney hours x $305 per hour) + (100 
Compliance Manager hours x $258 per hour) + (220 Programmer Analyst 
hours x $193 per hour) + (120 Business Analyst hours x $194 per 
hour) = $213,540. The $305 per-hour figure for an Attorney; the $258 
per hour figure for a Compliance Manager; the $193 per hour figure 
for a Programmer Analyst; and the $194 per hour figure for a 
Business Analysis (Intermediate) are from SIFMA's Management & 
Professional Earnings in the Securities Industry 2008, modified by 
Commission staff to account for an 1800-hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead. Commission staff also estimates that each 
exchange and association would outsource, on average, 50 hours of 
legal time, at an average hourly rate of $400. Thus, the Commission 
preliminarily estimates, on average, a total cost of $233,540 per 
SRO. See supra Section V.D.1.a. (discussing PRA costs for developing 
and filing the NMS plan).
    \343\ Commission staff estimates that annually each exchange and 
association would expend (64 Attorney hours x $305 per hour) + (64 
Compliance Manager hours x $258 per hour) + (64 Programmer Analyst 
hours x $193 per hour) = $48,384, to ensure that the NMS plan is up 
to date and remains in compliance with the proposed Rule. See supra 
note 301.
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    In estimating the costs for creation of the NMS plan, the 
Commission considered exchange and FINRA staff time necessary for 
preparing and filing the plan with the Commission. The Commission also 
considered the cost of outsourced legal services. The Commission 
requests comment on whether there are additional costs that would 
contribute to the expense of creating and filing the NMS plan. Please 
describe any such cost in detail and provide an estimate of the costs. 
In estimating the ongoing costs of the NMS plan, the Commission 
considered exchange and FINRA staff time necessary for periodically 
reviewing the plan in light of current market trends and technology. 
The Commission requests comment on these estimates and what types of 
costs would be incurred to keep the plan up to date.
2. Synchronizing Clocks
    The proposed Rule would require each exchange and FINRA, and the 
members of each exchange and FINRA, to synchronize its business clocks 
that are used for the purpose of recording the date and time of any 
reportable event that must be reported pursuant to the proposed Rule to 
the time maintained by the National Institute of Standards and 
Technology, consistent with industry standards.\344\ As part of the 
initial implementation of the consolidated audit trail, the exchanges, 
FINRA and their members therefore would have to ensure that their 
business clocks are synchronized with the time maintained by the 
National Institute of

[[Page 32597]]

Standards and Technology. The proposed Rule also would require that the 
NMS plan provide for the annual evaluation of the synchronization time 
standard to determine whether it should be shortened, consistent with 
industry standards.\345\
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    \344\ See proposed Rule 613(d)(1).
    \345\ See proposed Rule 613(d)(2).
---------------------------------------------------------------------------

    The Commission recognizes that the cost to each SRO and member to 
synchronize their clocks consistent with the proposed requirements 
would vary depending upon the SRO or member's existing systems. The 
Commission preliminarily believes, however, that most SROs and their 
members currently synchronize their clocks, and that therefore the SROs 
and their members would not incur significant costs to comply with this 
requirement.\346\ The Commission recognizes that each individual member 
or SRO's costs may vary depending upon their current synchronization 
practices, their business structure, their order management and trading 
systems, and their geographic diversity. The Commission preliminarily 
estimates that an SRO or member that would need to make system changes 
to comply with the requirement would incur an average one-time initial 
cost of approximately $9,650.\347\
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    \346\ See CHX Rule 4, Interpretations and Policies .02; FINRA 
Rule 7430; NYSE and NYSE Amex Equities Rule 123, Supplementary 
Material .23; NYSE and NYSE Amex Equities Rule 132A; and NYSE Arca 
Options Rule 6.20.
    \347\ Commission staff estimates that, on average, each 
exchange, association, and member would expend 50 hours of 
information technology time, at a cost of $193 per hour to make 
systems changes to comply with the requirement that clocks be 
synchronized. This estimate is based on discussions with market 
participants.
---------------------------------------------------------------------------

    The Commission also preliminarily estimates that there would be an 
average ongoing annual cost of approximately $11,580 to each exchange, 
FINRA, and member to synchronize their business clocks to the time 
maintained by the National Institute of Standards and Technology, 
consistent with industry standards.\348\ Further, the Commission 
preliminarily estimates that there would be an average cost to 
exchanges, FINRA and their members of approximately $6,192 per SRO or 
member to annually evaluate the synchronization time standards to 
determine whether it should be shortened, consistent with industry 
standards.\349\
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    \348\ Commission staff estimates that each exchange, association 
and member would expend approximately five hours of information 
technology time, per month, at $193 per hour. This estimate is based 
on discussions with industry participants.
    \349\ This estimate assumes that each SRO or member would expend 
(16 Programmer Analyst hours x $193 per hour) + (16 Business Analyst 
hours x $194 per hour) = $6,192 to carry out this annual evaluation.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \350\ 15 U.S.C. 78q(a) et seq.; 17 CFR 240.17a-1. Rule 17a-1 
requires an exchange or association to keep and preserve at least 
one record of all documents or other records that shall be received 
by it in the course of its business as such and in the conduct of 
its self-regulatory activity. This would include records of the 
receipt of all orders entered into their systems, as well as records 
of the routing, modification, cancellation, and execution of those 
orders. The Commission understands that SROs have automated this 
process and thus keep these records in electronic format.
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    Likewise, the Commission preliminarily believes the proposed Rule 
would require the collection of much of the information that registered 
broker-dealers already maintain in compliance with existing 
regulations.\351\ The proposed Rule, however, would require members to 
collect additional information for each order and, in addition to the 
new information, the members also would be required to report most of 
the information on a real time basis to the central repository in a 
specified uniform format. Based on discussions with members, the 
Commission anticipates that the SRO members would need to enhance or 
replace their current order handling, trading and other systems to be 
able to collect and report the required order and reportable event 
information to the central repository as required by the proposed Rule.
---------------------------------------------------------------------------

    \351\ See supra notes 317 to 319 and accompanying text.
---------------------------------------------------------------------------

    The Commission recognizes that the extent to which a particular SRO 
or member would need to make systems changes would differ depending 
upon the SRO's market structure (e.g., floor vs. electronic) and 
systems, or the member's current business operations and systems. The 
Commission preliminarily estimates that the average one-time, initial 
cost to exchanges and FINRA to put in place the systems necessary to 
identify, collect and transmit the consolidated audit trail information 
to the central repository would total approximately $5 million per 
SRO,\352\ for an aggregate estimated cost of $75 million for all SROs. 
In estimating this cost, the Commission has considered SRO staff time 
necessary to build new systems or enhance existing systems to comply 
with the proposed Rule.\353\ In addition, the Commission estimated 
costs for system hardware, software, and other materials.\354\ What 
other types of costs

[[Page 32598]]

might SROs incur? Please be specific in your response.
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    \352\ The Commission based this estimated cost on the 
Commission's previous experience with, and burden estimates for, SRO 
systems changes and discussions with market participants. See 
Regulation NMS Reproposing Release, supra note 306, at 77480 
(discussing costs of implementing Rule 611 of Regulation NMS). 
Although the Commission recognizes that the substance of Rule 611 is 
not the same as the proposed Rule, the Commission preliminarily 
believes that the scope of systems changes would be comparable.
    \353\ Commission staff estimates that each exchange and 
association would expend (100 Attorney hours x $305 per hour) + (80 
Compliance Manager hours x $258 per hour) + 1,960 Programmer Analyst 
hours x $193 per hour) + 60 Business Analyst hours x $194) = 
$441,060 to develop and implement the systems needed to capture the 
required information and transmit it. In addition, the Commission 
estimates that each exchange and association would expend 40 hours 
of outsourced legal time at an average rate of $400 per hour. See 
supra note 305.
    \354\ Commission staff estimates that the cost for system 
hardware, software, and other materials would be $4,542,940. See 
supra note 306 and accompanying text.
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    Once an SRO has implemented the changes necessary to collect and 
transmit the required information to the central repository as required 
by the proposed Rule, the Commission estimates that each SRO would 
incur, on average, an annual ongoing cost of $2.5 million to ensure 
compliance with the proposed Rule,\355\ for an estimated ongoing annual 
aggregate cost of $37.5 million for all SROs.
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    \355\ Commission staff estimates that each exchange and 
association would expend (1,500 Attorney hours x $305 per hour) + 
(1,600 Compliance Manager hours x $258 per hour) + (1,375 Programmer 
Analyst hours x $193 per hour) + (500 Business Analyst hours x $194 
per hour) to ensure that the systems technology is up to date and 
remains in compliance with the proposed Rule, for a total of 
$1,250,675. In addition, Commission staff estimates that each 
exchange and association would expend approximately $1.25 million on 
system hardware, software, connectivity and other materials. These 
estimates reflect the preliminary view that ongoing costs to 
maintain compliance with the proposed Rule would be half of the 
initial costs. See supra notes 307 and 308.
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    The Commission understands that many members, particularly smaller 
members, currently rely on third parties to report information required 
to be reported pursuant to SRO audit trail or other rules. For example, 
a member that is an introducing broker who sends all of its customer 
order flow to a clearing broker currently may rely on that clearing 
broker for reporting purposes. The Commission preliminarily believes 
that these members would not undertake a fundamental restructuring of 
their business to comply with the proposed Rule. Instead, they might 
continue to rely on their clearing broker-dealer, or they might look 
for the ability to purchase a standardized software product provided by 
a third party that would provide the functionality to electronically 
capture the required information and transmit it to the central 
repository in real time. The costs of this approach are likely to be 
significantly lower than the costs to a member that enhances its own 
systems, or creates new systems, to comply with the proposed 
requirements to report information to the central repository. The 
Commission estimates that there are approximately 3,006 of these types 
of members, and that the average cost to such members to compensate a 
third party, whether a clearing broker-dealer or other third party, for 
software that would provide the necessary functionality to 
electronically capture the required information and transmit it to the 
central repository would be approximately $50,000 per member.\356\ In 
addition, the Commission estimates that, on average, each member would 
incur a one-time cost of $35,870 to incorporate the new functionality 
into its existing systems to ensure compliance with the proposed 
Rule.\357\ Thus, the Commission preliminarily estimates that each of 
these members would incur, on average, a one-time cost of $85,870, for 
an estimated aggregate cost of $258,125,220.
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    \356\ See supra note 328. The Commission based this estimated 
cost on the Commission's previous experience with, and burden 
estimates for, broker-dealer systems changes. See Regulation NMS 
Reproposing Release, supra note 306, at 77480 (discussing costs of 
implementing Rule 611 of Regulation NMS). Although the Commission 
recognizes that the substance of Rule 611 is not the same as the 
proposed Rule, the Commission preliminarily believes that the scope 
of systems changes would be comparable.
    \357\ Commission staff estimates that annually each of these 
types of members would expend (50 Attorney hours x $305 per hour) + 
(50 Compliance Manager hours x $258 per hour) + (40 Information 
Analyst hours x $193 per hour) = $35,870 to incorporate the new 
functionality into its existing systems.
    These costs would include any systems or other changes necessary 
to obtain the required customer information, including the identity 
of the beneficial owner, and electronically storing it for 
transmittal to the central repository with the order information.
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    The Commission also preliminarily estimates that each of these 
members would continue to incur, on average, annual costs of $66,512 to 
ensure continued compliance with the proposed Rule.\358\
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    \358\ This estimate is based on a cost of $50,000 per year to 
compensate a third party for the functionality to capture the 
required information and transmit it to the central repository, and 
a cost of $16,512 for personnel time to oversee compliance with the 
proposed Rule (64 hours Compliance Manager x $258 per hour). See 
supra note 330.
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    Do commenters believe that smaller members would likely rely on 
third parties to provide a functionality that would provide required 
data to the central repository? Why or why not? Would it be more cost 
effective for a small member to enhance existing systems or create new 
systems to comply with the proposed Rule? Why or why not? What would be 
the costs associated with each approach? Should members that currently 
rely on another party to report, such as their clearing broker, be able 
to have their clearing firms report on their behalf? Why or why not? 
How would allowing third-party reporting impact the ability to report 
data in real time? Would the manner in which these members currently 
maintain customer information create practical difficulties for 
providing the beneficial ownership information, or additional burdens 
that have not been taken into account in estimating costs? For example, 
is customer information stored electronically? What is the impact of 
the manner in which this information is currently stored on the 
Commission's cost estimates?
    The Commission preliminarily estimates that there are 1,114 members 
that would undertake their own development changes to implement the 
proposed Rule.\359\ The Commission preliminarily estimates that the 
average one-time, initial cost to these members for development, 
including programming and testing of the systems necessary to identify, 
collect and transmit the consolidated audit trail information to the 
central repository, would be approximately $3 million per member,\360\ 
for an estimated aggregate cost of $3,342,000,000. This number would 
likely overestimate the costs for some of these members and 
underestimate it for others. For example, it likely overestimates the 
cost for ATSs as opposed to broker-dealers that have a customer and 
proprietary, or market-making, business, in part because of the 
narrower business focus of some ATSs. The Commission recognizes that 
some of these members may contract with one or more outside vendors to 
provide certain front-end order management systems. The third-party 
vendor may make changes to its systems to permit the members that use 
the system to capture and provide the required information to the 
central repository. Likewise, some of these members may contract with 
outside vendors to provide back-office functionality. These third-party 
vendors may make changes to their systems to permit the members that 
use the systems to capture and provide the required information to the 
central repository. The cost of these changes may be shared by the 
various members that use the systems, and thus may result in a reduced 
cost to an individual

[[Page 32599]]

member to implement changes to its own systems to comply with the 
requirements of the proposed consolidated audit trail.
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    \359\ See supra Section V.D.2 and note 320.
    \360\ Commission staff estimates that each member would expend 
(1,240 Attorney hours x $305 per hour) + (1,540 Compliance Manager 
hours x $258 per hour) + (2,750 Programmer Analyst hours x $193 per 
hour) + (1,000 Business Analyst hours x $194 per hour) = $1,500,270 
to develop and implement the systems needed to capture the required 
information and transmit it. In addition, the Commission estimates 
that the cost for system hardware, software, and other materials 
would be approximately $1.5 million. This estimate is based on the 
Commission's previous experience with, and burden estimates for, 
broker-dealer systems changes. See Regulation NMS Reproposing 
Release, supra note 306, at 77480 (discussing cost estimates for 
implementing Rule 611 of Regulation NMS). Although the Commission 
recognizes that the substance of Rule 611 is not the same as the 
proposed Rule, the Commission preliminarily believes that the scope 
of systems changes would be comparable. These costs would include 
any systems or other changes necessary to obtain the required 
customer information, including the identity of the beneficial 
owner, and electronically storing it for transmittal to the central 
repository with the order information.
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    The Commission requests comment on this estimate. Specifically, 
what types of costs would members incur building new systems, or 
enhancing existing systems, to comply with the proposed Rule? Would 
members need to expand their capacity as part of any systems upgrades? 
What would be the costs associated with this? Would the manner in which 
these members currently maintain customer information create practical 
difficulties for providing the beneficial ownership information, or 
additional burdens that have not been taken into account in estimating 
costs? For example, is customer information stored electronically? What 
is the impact of the manner in which this information is currently 
stored on the Commission's cost estimates?
    Once these members have largely implemented the changes necessary 
to collect and report the required order and reportable event 
information to the central repository as required by the proposed Rule, 
the Commission estimates that each such member would incur, on average, 
an annual ongoing cost of approximately $1.5 million,\361\ for an 
estimated aggregate ongoing cost of $1,671,000,000. These estimates 
would cover the costs associated with continued compliance with the 
proposed Rule.\362\
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    \361\ Commission staff estimates that each member would expend 
(800 Attorney hours x $305 per hour) + (1,000 Compliance Manager 
hours x $258 per hour) + (500 Programmer Analyst hours x $193 per 
hour) + (750 Business Analyst hours x $194 per hour) = $744,000 to 
ensure that the systems technology is up to date and remains in 
compliance with the proposed Rule. In addition, Commission staff 
estimates that each member would expend approximately $756,000 on 
system hardware, software, connectivity and other materials. These 
estimates reflect the preliminary view that ongoing costs to 
maintain compliance with the proposed Rule would be half of the 
initial estimated costs.
    \362\ See supra Section V.D.2.
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    The Commission requests comment on what ongoing costs SROs and 
their members would incur to continue to collect and report the 
required information in compliance with the proposed Rule. What types 
of costs would be included? Are there differences in the costs that 
SROs and their members would incur? Why or why not?
    The proposal would require the transmission of information in real 
time to the central repository. The Commission preliminarily believes 
that this approach would have greater benefits and would be lower cost 
than an alternative of transmitting all reports in batch mode. Real 
time submission could simply require a ``drop copy'' of a reportable 
event be sent to the central repository at the same time that the 
reportable event is otherwise occurring. Batching, however, would 
require the build up of reports to be sent periodically, and the amount 
of data sent in a batch could be significantly larger than the data 
sent in real time. The Commission requests comment on the technology 
requirements and other costs of real time transmission of information 
versus periodically batching the reports. Would real time reporting be 
more or less costly than batch reporting? Please explain with 
specificity why or why not and provide cost estimates. If real time 
reporting would be more expensive, are the greater costs justified by 
the benefits of real time reporting described above? If batch reporting 
is the better alternative, what should be the frequency of the batch 
reporting and why? Does the answer depend on the type of security? The 
Commission also requests comment on what types of systems changes SROs 
and members would need to make to implement the proposed Rule and NMS 
plan requirements, and the attendant costs. What specific types or 
items of information, if any, would be required to be reported to the 
central repository by a member that would not already be collected and 
maintained in an automated format?
4. Cost of Enhanced Surveillance Systems
    Pursuant to the proposed Rule, exchanges and FINRA also would be 
required to develop and implement a surveillance system, or enhance 
existing surveillance systems, reasonably designed to make use of the 
consolidated information collected through the proposed consolidated 
audit trail.\363\ The Commission preliminarily estimates that the 
average one-time cost to implement this requirement would be 
approximately $10 million for each exchange and FINRA, for an estimated 
aggregate cost of $150 million.\364\ The Commission also estimates, on 
average, ongoing annual costs associated with the enhanced surveillance 
would be approximately $2,610,600,\365\ for an estimated aggregate, 
ongoing cost of $39,159,000. Based on discussions with market 
participants, the Commission recognizes that these estimated costs may 
vary, perhaps significantly, based on the market model utilized by a 
particular SRO. For certain SROs, these figures may overestimate the 
costs associated with developing or enhancing surveillance systems, 
while for others, it may underestimate the costs. The Commission 
requests comment on whether these figures accurately estimate the costs 
for developing or enhancing surveillance systems to comply with the 
proposed Rule for the SROs. Would these figures be lower or higher for 
SROs whose trading systems are fully electronic? Would the cost 
estimates be higher or lower for those SROs that have a trading floor? 
What other considerations would impact individual SRO costs? Please be 
specific in your response.
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    \363\ See proposed Rule 613(f).
    \364\ This estimate is based on discussions with market 
participants. This estimate does not separately break out personnel 
time versus system costs.
    \365\ Commission staff estimates that each member would expend 
(3,600 Senior Compliance Examiner hours x $212 per hour) and (1,800 
Information Analyst hours x $193 per hour) to operate and monitor 
the enhanced surveillance systems and carry out surveillance 
functions. In addition, Commission staff estimates that each member 
would expend approximately $1.5 million on system hardware, 
software, connectivity and other technology per year on an on-going 
basis for this purpose. These estimates are based on discussions 
with a market participant.
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    The Commission also requests comment on whether SROs would be able 
to enhance their existing surveillance and regulation to make use of 
the proposed consolidated information or would they need to develop new 
surveillance systems to comply with the proposed Rule? How would SROs 
enhance their current surveillance systems? What would be the costs 
associated with updating current systems as opposed to developing new 
surveillance systems? Would it be more cost efficient to establish 
coordinated surveillance across exchanges and FINRA, rather than having 
each SRO be responsible for surveillance on its own market using the 
consolidated data? What would be the costs associated with developing 
consolidated cross-market surveillance?
5. Central Repository System
    The central repository would be responsible for the receipt, 
consolidation, and retention of all the data required to be submitted 
by the exchanges and FINRA, and their members. The proposed Rule also 
would require that the central repository collect and retain on a 
current and continuous basis the NBBO for each NMS security, 
transaction reports reported pursuant to an effective transaction 
reporting plan, and last sale reports reported pursuant to the OPRA 
Plan. The central repository would be

[[Page 32600]]

required to maintain the NBBO and transaction data in a format 
compatible with the order and event information collected pursuant to 
the proposed Rule. Further, the central repository would be required to 
retain the information collected pursuant to paragraphs (c)(7) and 
(e)(5) of the proposed Rule in a convenient and usable standard 
electronic data format that is directly available and searchable 
electronically without any manual intervention for a period of not less 
than five years. The information shall be available immediately, or if 
immediate availability cannot reasonably and practically be achieved, 
any search query must begin operating on the data not later than one 
hour after the search query is made.\366\
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    \366\ See proposed Rule 613(e)(6).
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    The central repository thus would need its own system(s) to 
receive, consolidate, and retain the electronic data received from the 
plan sponsors and their members, as well as to collect and retain the 
NBBO and last sale data. The system would be required to be accessible 
and searchable by the sponsors and the Commission for regulatory 
purposes,\367\ with validation parameters allowing the central 
repository to automatically check the accuracy and the completeness of 
the data submitted, and reject data not conforming to these parameters. 
It is anticipated that the costs of development and operation of the 
central repository would be shared among the plan sponsors. The 
Commission preliminarily estimates a one-time initial cost to create 
the central repository, its systems and structure, of approximately 
$120 million for an average cost of approximately $8 million per plan 
sponsor.\368\
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    \367\ The proposed Rule would require that the central processor 
create and maintain a method of access to the consolidated data. See 
proposed Rule 613(e)(3). The Rule requires that this method of 
access would be designed to include search and reporting functions 
to optimize the use of the consolidated data. The cost of creating a 
method of access to the consolidated audit trail data is included 
within the overall systems cost estimate.
    \368\ Commission staff estimates that each exchange and 
association would expend (3,000 Attorney hours x $305 per hour) + 
(4,000 Compliance Manager hours x $258 per hour) + (7,500 Programmer 
Analyst hours x $193 per hour) + (3,000 Business Analyst hours x 
$194 per hour) = $3,976,500 to create the central repository. In 
addition, the Commission estimates that the cost per exchange or 
association for system hardware, software, and other materials would 
be approximately $4 million. See supra Section V.D.1.d. and note 
309.
    This estimate includes the estimated costs that each exchange 
and association would incur for software and hardware costs related 
to systems development. This cost estimate also would encompass (1) 
costs related to engaging in an analysis and formal bidding process 
to choose the plan processor, and (2) any search undertaken to hire 
a CCO. See proposed Rule 613(a)(3)(i) (the plan sponsors would be 
required to select a person to act as a plan processor for the 
central repository no later than two months after the effectiveness 
of the NMS plan) and 613(b)(5) (the plan sponsors would be required 
to appoint a CCO to regularly review the operation of the central 
repository to assure its continued effectiveness in light of market 
and technological developments, and make any appropriate 
recommendations for enhancements to the nature of the information 
collected and the manner in which the information is processed).
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    Does this estimate accurately reflect SRO staff time needed to 
create the central repository as well as the costs for any hardware, 
software and other materials required? Are there other cost components 
to creating the central repository the Commission should consider? Is 
the creation of a central repository as described in the proposed Rule 
for collection and consolidation of data the most cost effective way to 
achieve the objective of creation of a consolidated audit trail? Are 
there other alternatives the Commission should consider? Please 
describe the costs associated with any alternatives described.
    Once the plan sponsors have established the systems necessary for 
the central repository to receive, consolidate, and retain the required 
information, the Commission estimates that ongoing annual costs to 
operate the central repository would be approximately $100 
million,\369\ which would be approximately $6.6 million per year per 
plan sponsor. The Commission also estimates that each plan sponsor 
would incur, on average, ongoing costs of $48,384 per year for actions 
taken to review the operation and administration of the central 
repository.\370\ In addition, the Commission estimates that the central 
repository would incur an ongoing cost of $1,370 per year to purchase 
the NBBO and last sale data feeds from the SIPs.\371\
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    \369\ See supra Section V.D.1.d. This cost estimate includes 
ongoing costs for operating the central repository, including the 
cost of systems and connectivity upgrades or changes necessary to 
receive, consolidate, and retain and store the reported order 
information from SROs and their members; the cost, including storage 
costs, of collecting and maintaining the NBBO and transaction data 
in a format compatible with the order and event information 
collected pursuant to the proposed Rule; the cost of monitoring the 
required validation parameters; the cost of compensating the plan 
processor; and an ongoing annual cost of $703,800 to compensate the 
CCO. See supra note 312.
    \370\ Commission staff estimates that annually each exchange and 
association would expend (64 Attorney hours x $305 per hour) + (64 
Compliance Manager hours x $258 per hour) + (64 Programmer Analyst 
hours x $193 per hour) = $48,384 to ensure and review the operation 
and administration of the central repository. See supra note 343 and 
accompanying text.
    \371\ See supra Section V.D.1.e.
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    The Commission request comment on these estimated costs. Does this 
estimate accurately reflect the cost of storing data in a convenient 
and usable standard electronic data format that is directly available 
and searchable, without any manual intervention, for a period of not 
less than 5 years? Would these costs estimates change if the scope of 
the consolidated audit trail were expanded to include equity securities 
that are not NMS securities; corporate bonds, municipal bonds, and 
asset-backed securities and other debt instruments; credit default 
swaps, equity swaps, and other security-based swaps? What systems or 
other changes would be necessary to accommodate these other products? 
How would those changes impact costs?
6. SRO Rule Filings
    The exchanges and FINRA also would be required to file proposed 
rule changes to implement the provisions of the NMS plan with respect 
to their members.\372\ The Commission notes that the exchanges and 
FINRA would be able to use the NMS plan as a roadmap to draft the 
content of their required proposed rule changes. The Commission also 
notes that the rule filing format and process is not new to the 
exchanges or to FINRA.\373\ The Commission estimates that the aggregate 
cost of each SRO filing a proposed rule change to implement the NMS 
plan to be approximately $590,175.\374\
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    \372\ See proposed Rule 613(g)(1).
    \373\ The Commission notes that, for its 2009 fiscal year 
(October 1, 2008 to September 30, 2009), the then existing twelve 
exchanges and FINRA filed approximately 1,308 proposed rule changes 
in the aggregate pursuant to Section 19(b) and Rule 19b-4 
thereunder.
    \374\ This figure was calculated as follows: (129 Attorney hours 
x $305) = $39,345 x 15 SROs = $590,175. Commission staff estimates 
that each exchange and association would expend approximately 129 
hours of legal time x $305 to prepare and file a complex rule 
change. See Securities Exchange Act Release No. 50486 (October 4, 
2004), 69 FR 60287 (October 8, 2004) (File No. S7-18-04). The $305 
per-hour figure for an attorney is from SIFMA's Management & 
Professional Earnings in the Securities Industry 2008, modified by 
Commission staff to account for an 1800-hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead. See Securities Exchange Act Release No. 
59748 (April 10, 2009), 74 FR 18042, 18093 (April 20, 2009) (S7-08-
09) (noting the Commission's modification to the $305 per hour 
figure for an attorney).
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7. Expansion of the Proposed Consolidated Audit Trail
    The proposed Rule would require the plan sponsors to jointly 
provide to the Commission a report outlining how the sponsors would 
incorporate into the consolidated audit trail information with respect 
to: (1) Equity securities that

[[Page 32601]]

are not NMS securities; (2) debt securities; and (3) primary market 
transactions in equity securities that are not NMS securities, in NMS 
stocks, and in debt securities. The sponsors would be required to 
address, among other things, details for each order and reportable 
events that they would recommend requiring to be provided; which market 
participants would be required to provide the data; an implementation 
schedule; and a cost estimate. Thus, the exchanges and FINRA would need 
to, among other things, undertake an analysis of technological and 
computer system acquisitions and upgrades that would be required to 
incorporate such an expansion. The Commission preliminarily estimates 
that the one-time cost to the exchanges and FINRA to create and file 
with the Commission a report for expanding the scope of the 
consolidated audit trail would be approximately $1,751,550 for a one-
time cost of $116,770 per SRO.\375\
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    \375\ Commission staff estimates that each member would expend 
(200 Attorney hours x $305 per hour) + (50 Compliance Manager hours 
x $258 per hour) + (110 Programmer Analyst hours x $193 per hour) + 
(60 Business Analyst hours x $194 per hour) + (25 Outsourced Legal 
Counsel hours x $400 per hour) = $116,770 to create and file with 
the Commission a report for expanding the scope of the consolidated 
audit trail. See supra Section V.D.1.b and note 302.
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    Does this estimate accurately reflect the expenses, including SRO 
staff time and systems analyses, which SROs would incur in preparing 
the required report? Are there other costs components that should be 
considered in determining costs associated with preparing the required 
report? Please provide details on any additional costs that should be 
considered.
8. Other Costs
    Proposed Rule 613 would specifically require, for the receipt or 
origination of each order, information to be reported to the central 
repository with respect to the ultimate customer that generates the 
order. Specifically, members would be required to report to the central 
repository information about the beneficial owner of the account 
originating the order and the person exercising investment discretion 
for the account originating the order, if different from the beneficial 
owner, and each customer would be identified by a unique customer 
identifier. Thus, information about ``live'' orders, as well as overall 
order and execution information for a particular customer, would be 
available in the central repository. In recognition of the sensitivity 
of this data, the proposed Rule requires the NMS Plan to include 
policies and procedures, including standards, to be used by the plan 
processor to ensure the security and confidentiality of all information 
submitted to, and maintained by, the central repository.
    However, a potential cost could be incurred if the security and 
confidentiality of the information submitted to the central repository 
is breached, either by malfeasance or accident. In either case, if 
identifying information about customers and their trading is made 
public--contrary to the expectations and intentions of the customers--
the Commission preliminarily believes that this may have a negative 
effect on the securities markets. Specifically, investors may be less 
willing to allocate their capital to the securities markets if their 
expectation that their personal identifying and trading information 
will be adequately protected by the central repository is not met. 
Under these circumstances, there could be a reduction in the capital 
invested in the markets for NMS securities by investors, to the 
detriment of the U.S. securities markets overall.
    Proposed Rule 613 also would require that the NMS plan include 
policies and procedures, including standards, for the plan processor to 
use to ensure the integrity of the information submitted to the central 
repository. Specifically, the proposed Rule requires that the policies 
and procedures be designed to ensure the timeliness, accuracy, and 
completeness of the data provided to the central repository by the 
exchanges, FINRA and their members, and to require the rejection of 
data provided if the data does not meet validation parameters, and the 
re-transmission of such data. The Commission notes that, despite such 
safeguards for ensuring the integrity of the audit trail data, the 
information submitted by the exchanges, FINRA and their members could 
be inaccurate, either due to system or human error. If the reliability 
of the data is compromised, this could reduce the usefulness of the 
consolidated audit trail data for regulatory purposes.
    Are there any other non-tangible costs associated with potential 
breaches of the integrity or confidentiality of the data required to be 
submitted to the central repository that the Commission should 
consider?
9. Total Costs
    Based on the assumptions and resulting estimated costs discussed 
above, the Commission preliminarily estimates the initial aggregate 
cost the exchanges and FINRA would incur to comply with the proposed 
Rule, other than costs related to creating and operating the central 
repository, would be approximately $231 million,\376\ and ongoing 
aggregate annual costs would be approximately $77.7 million.\377\ In 
addition, the exchanges and FINRA would incur an initial aggregate cost 
of approximately $120 million to set up the central repository,\378\ 
with ongoing annual costs to operate the central repository of 
approximately $101 million.\379\ For SRO members that would make 
changes to their own order management and trading systems to comply 
with the proposed Rule,\380\ we estimate the initial aggregate one-time 
cost for implementation of the proposed Rule would be approximately 
$3.4 billion \381\ and aggregate ongoing annual costs would be 
approximately $1.7 billion.\382\ For SRO members that are

[[Page 32602]]

likely to rely on a third party to comply with the proposed Rule (such 
as their clearing broker),\383\ we estimate the initial aggregate one-
time cost for implementation of the proposed Rule would be 
approximately $287 million \384\ and ongoing annual costs would be 
approximately $253 million.\385\ Therefore, for all SROs and members, 
we estimate that the total one-time aggregate cost to implement the 
proposed Rule would be approximately $4 billion and the total ongoing 
aggregate annual costs would be approximately $2.1 billion.
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    \376\ This aggregate cost estimate includes the aggregate one-
time cost of preparing and filing the NMS plan ($3,503,100); the 
aggregate average one-time cost for each exchange and FINRA to 
synchronize clocks consistent with the proposed requirements 
($144,750); the aggregate average one-time cost for each exchange 
and FINRA to identify, collect and transmit the consolidated audit 
trail information to the central repository ($75 million); the 
aggregate average one-time cost for each exchange and FINRA to 
develop and implement surveillance systems, or enhance existing 
surveillance systems ($150 million); the aggregate one-time cost for 
each exchange and FINRA to file proposed rule changes to implement 
the provisions of the NMS plan with respect to their members 
($590,175); and the aggregate one-time cost to the exchanges and 
FINRA of jointly providing to the Commission a report outlining how 
the exchanges and FINRA would expand the scope of the consolidated 
audit trail ($1,751,550).
    \377\ This aggregate cost estimate includes the aggregate 
average ongoing annual cost to ensure that the plan is up to date 
and remains in compliance with the proposed Rule ($725,760); the 
aggregate average ongoing annual cost to synchronize clocks 
consistent with industry standards ($173,700); the aggregate average 
ongoing annual cost to evaluate the synchronization standards 
($92,880); the aggregate average ongoing annual cost to ensure that 
each exchange and FINRA is providing information in compliance with 
the proposed Rule ($37.5 million); and the aggregate average ongoing 
annual cost associated with enhanced surveillance ($39,159,000).
    \378\ See supra note 368.
    \379\ See supra notes 369 to 371 and accompanying text.
    \380\ We preliminarily estimate there are 1,114 of these broker-
dealers, including all clearing firms and alternative trading 
systems. See supra note 320.
    \381\ This aggregate cost estimate includes the aggregate 
average one-time cost for such members to identify, collect and 
transmit the consolidated audit trail information to the central 
repository ($3,342,000,000); and the aggregate average initial cost 
for such members to synchronize clocks consistent with the proposed 
requirements ($10,750,100).
    \382\ This aggregate cost estimate includes the aggregate 
average ongoing annual cost for such members to identify, collect 
and transmit the consolidated audit trail information to the central 
repository ($1,671,000,000); and the aggregate average ongoing 
annual cost for such members to annually evaluate the 
synchronization time standards and perform any necessary 
synchronization adjustments ($19,798,008).
    \383\ We preliminarily estimate there are 3,006 of these broker-
dealers, mainly including non-clearing broker-dealers. See supra 
note 327.
    \384\ This aggregate cost estimate includes the aggregate 
average initial cost for such members to identify, collect and 
transmit the consolidated audit trail information to the central 
repository ($258,125,220); and the aggregate average initial cost 
for such members to synchronize clocks consistent with the proposed 
requirements ($29,007,900).
    \385\ This aggregate cost estimate includes the aggregate 
average ongoing annual cost for such members to identify, collect 
and transmit the consolidated audit trail information to the central 
repository ($199,935,072); and the aggregate average ongoing annual 
cost for such members to annually evaluate the synchronization time 
standards and perform any necessary synchronization adjustments 
($53,422,632).
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C. Request for Comment

    The Commission requests general comment on the costs and benefits 
of proposed Rule 613 of Regulation NMS discussed above, as well as any 
costs and benefits not already described which could result from the 
proposed Rule. The Commission also requests data to quantify any 
potential costs or benefits.
    The Commission requests comment on what, if any, would be the 
impact of the proposed Rule on competition among the exchanges and 
other non-exchange market centers? If commenters believe there would be 
an impact on competition, please explain and quantify the costs or 
benefits of such impact. If commenters believe that there would be a 
cost, what steps could the Commission take to mitigate such costs?
    The Commission also requests comment on whether the requirements of 
the proposed Rule, such as the requirement to provide detailed 
information to the central repository on a real time basis, would have 
an impact on any form of legal trading activity engaged in by market 
participants, or the speed with which trading occurs. For example, 
would requiring additional information to be attached to an order when 
the order is routed from one member or exchange to another--such as the 
unique order identifier--impact the speed with which routing and 
trading occurs? If not, why not? If so, why? If there would be an 
impact, do commenters believe that the impact would be negative? Why or 
why not? Also, would the requirement to provide customer and order 
information to the central repository in real time impact market 
participant trading activity? If so, how so? If commenters believe the 
impact would provide a benefit, please explain and quantify. If 
commenters believe that the impact would impose a cost, please explain 
and quantify. For example, would market participants be hesitant to 
engage in certain legal trading activity because of a concern about 
providing customer and order information in real time? Would market 
participants shift their trading activity to products or markets that 
do not require the capture of customer information to avoid compliance 
with this requirement of the proposed Rule? If so, how should the 
Commission address those concerns? Please be specific in your 
responses. The Commission requests comment on any other changes to 
behavior that commenters believe may result from application of the 
proposed Rule. For example, do commenters believe that the proposal 
would cause illegal trading activity to shift to products or markets 
not covered by the proposed Rule? If so, should that impact the scope 
of the proposed Rule? If so, how so? If not, why not?

VII. Consideration of Burden on Competition and Promotion of 
Efficiency, Competition, and Capital Formation

    Section 3(f) of the Exchange Act requires the Commission, whenever 
it engages in rulemaking and is required to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to consider, in addition to the protection of investors, whether the 
action would promote efficiency, competition, and capital 
formation.\386\ In addition, Section 23(a)(2) of the Exchange Act 
requires the Commission, when making rules under the Exchange Act, to 
consider the impact such rules would have on competition.\387\ Exchange 
Act Section 23(a)(2) prohibits the Commission from adopting any rule 
that would impose a burden on competition not necessary or appropriate 
in furtherance of the purposes of the Exchange Act. As discussed below, 
the Commission's preliminary view is that the proposed Rule should 
promote efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \386\ 15 U.S.C. 78c(f).
    \387\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    Section 11A(a)(3)(B) of the Exchange Act provides in part that the 
Commission may, by rule, require SROs to act jointly with respect to 
matters as to which they share authority under the Exchange Act in 
regulating a national market system for securities.\388\ Proposed Rule 
613 would require all national securities exchanges and national 
securities associations to jointly submit to the Commission an NMS plan 
to create, implement, and maintain a consolidated audit trail for NMS 
securities. Under the proposal, pursuant to the NMS plan, and SRO rules 
adopted thereunder to implement the plan, national securities exchanges 
and national securities associations, as well as their members, would 
be required to provide detailed order and execution data to a central 
repository to populate a consolidated audit trail.\389\
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    \388\ See Section 11A(a)(3)(B) of the Exchange Act, 15 U.S.C. 
78k-1(a)(3)(B).
    \389\ See supra Section III.D. for a detailed description of the 
required data.
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A. Competition

    The Commission considered the impact of proposed Rule 613 on the 
national securities exchanges, national securities associations, and 
their members that trade NMS securities. The Commission begins its 
consideration of potential competitive impacts with observations of the 
current structure of the markets for trading NMS securities.
    The industry for the trading of NMS securities is a competitive 
one, with reasonably low barriers to entry and significant competition 
for order flow. The intensity of competition across trading platforms 
that trade NMS securities has increased dramatically in the past decade 
as a result of technological advances and regulatory changes. This 
increase in competition has resulted in decreases in market 
concentration, more competition among market centers, a proliferation 
of trading platforms competing for order flow, and decreases in trading 
fees.
    In addition, the Commission, within the past five years, has 
approved applications by BATS,\390\ Direct

[[Page 32603]]

Edge,\391\ Nasdaq,\392\ and C2 \393\ to become registered as national 
securities exchanges for trading equities, approved proposed rule 
changes by two existing exchanges--the ISE \394\ and CBOE \395\--to add 
cash equity trading facilities to their existing options business; and 
approved proposed rule changes by two existing exchanges--Nasdaq and 
BATS--to add options trading facilities to their existing cash equities 
business.\396\
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    \390\ See Securities Exchange Act Release No. 58375 (August 18, 
2008), 73 FR 49498 (August 21, 2008) (order approving BATS 
Exchange's application for registration as a national securities 
exchange).
    \391\ See Securities Exchange Act Release No. 61698 (March 12, 
2010), 75 FR 13151 (March 18, 2010) (order approving EDGA Exchange 
and EDGX Exchange's applications for registration as national 
securities exchanges).
    \392\ See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (File No. 10-131) (order 
approving Nasdaq's application for registration as a national 
securities exchange).
    \393\ See Securities Exchange Act Release No. 61152 (December 
10, 2009), 74 FR 66699 (December 16, 2009) (order approving C2 
Options Exchange's application for registration as a national 
securities exchange).
    \394\ See Securities Exchange Act Release No. 54528 (September 
28, 2006), 71 FR 58650 (October 4, 2006) (order approving rules to 
govern trading equities).
    \395\ See Securities Exchange Act Release No. 55389 (March 2, 
2007), 72 FR 10575 (March 8, 2007 (order approving CBOE Stock 
Exchange LLC as a facility of CBOE).
    \396\ See Securities Exchange Act Release Nos. 57478 (March 12, 
2008), 73 FR 14321 (March 18, 2008) (order approving rules governing 
the trading of options on the Nasdaq Options Market, LLC); and 61419 
(January 26, 2010), 75 FR 5157 (February 1, 2010) (order approving 
rules governing the trading of options on BATS Options Exchange, 
Inc.).
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    The Commission believes that competition among trading venues for 
NMS stocks has been facilitated by several Commission rules: Rule 611 
(the Order Protection Rule), which encourages quote-based competition 
between market centers; Rule 605, which empowers investors and brokers 
to compare execution quality statistics across trading venues; and Rule 
606, which enables customers to monitor the order routing practices. 
Similarly, there is rigorous competition among the options exchanges 
that has been facilitated by regulatory efforts. These include the move 
to multiple listing,\397\ the extension of the Commission's Quote Rule 
to options,\398\ the prohibition against trading outside of the 
national best bid and offer,\399\ the adoption of market structures on 
the floor-based exchanges that permit individual market maker 
quotations to be reflected in the exchange's quotation,\400\ and the 
Minimum Quoting Increment Pilot Program.\401\
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    \397\ See Securities Exchange Act Release No. 26870 (May 26, 
1989), 54 FR 23963 (June 5, 1989) (S7-25-87).
    \398\ See Securities Exchange Act Release No. 43591 (November 
17, 2000), 65 FR 75439 (December 1, 2000).
    \399\ See Securities Exchange Act Release No. 60405 (July 30, 
2009), 74 FR 39362 (August 6, 2009) (approved of Options Order 
Protection and Locked/Crossed Market Plan).
    \400\ See, e.g., Securities Exchange Act Release No. 47959 (May 
30, 2003), 68 FR 34441, 34442 (June 9, 2003) (SR-CBOE-2002-05) 
(adopting, among other things, amendments to incorporate firm quote 
requirements in CBOE's rules).
    \401\ On January 26, 2007, the then-existing six options 
exchanges implemented a pilot program to quote certain options 
series in thirteen classes in one-cent increments (``Minimum Quoting 
Increment Pilot Program''). Nasdaq became a participant in the 
Minimum Quoting Increment Pilot Program on March 31, 2008, when it 
commenced trading on its options platform, and BATS become a 
participant in the Pilot Program on February 26, 2010, when it 
commenced trading on BATS Options. Since 2007, the Minimum Quoting 
Increment Pilot Program has been extended and expanded several 
times. See, e.g., Securities Exchange Act Release Nos. 56276 (August 
17, 2007), 72 FR 47096 (August 22, 2007) (SR-CBOE-2007-98); 56567 
(September 27, 2007), 72 FR 56396 (October 3, 2007) (SR-Amex-2007-
96); 57579 (March 28, 2008), 73 FR 18587 (April 4, 2008) (SR-Nasdaq-
2008-026); 60711 (September 23, 2009), 74 FR 49419 (September 28, 
2009) (SR-NYSEArca-2009-44); and 61061 (November 24, 2009), 74 FR 
62857 (December 1, 2009) (SR-NYSEArca-2004-44).
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    The broker-dealer industry also is a highly competitive industry 
with low barriers to entry. Most trading activity is concentrated among 
several dozen large participants, with thousands of small participants 
competing for niche or regional segments of the market. The reasonably 
low barriers to entry for broker-dealers are evidenced, for example, by 
the fact that the average number of new broker-dealers entering the 
market each year between 2001 and 2008 was 389.\402\
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    \402\ This number is based on a Commission staff review of FOCUS 
Report filings reflecting registered broker-dealers from 2001 
through 2008. The number does not include broker-dealers that are 
delinquent on FOCUS Report filings. New registered broker-dealers 
for each year during the period from 2001 through 2008 were 
identified by comparing the unique registration number of each 
broker-dealer filed for the relevant year to the registration 
numbers filed for each year between 1995 and the relevant year.
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    There are approximately 5,178 registered broker-dealers, of which 
approximately 890 are small broker-dealers.\403\ To limit costs and 
make business more viable, the small participants often contract with 
bigger participants to handle certain functions, such as clearing and 
execution, or to update their technology. Larger broker-dealers often 
enjoy economies of scale over smaller broker-dealers and compete with 
each other to service the smaller broker-dealers, who are both their 
competitors and customers.
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    \403\ These numbers are based on a review of 2007 and 2008 FOCUS 
Report filings reflecting registered broker-dealers, and discussions 
with SRO staff. The number does not include broker-dealers that are 
delinquent on FOCUS Report filings.
---------------------------------------------------------------------------

    In the Commission's preliminary judgment, the costs of proposed 
Rule 613 would not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act. In 
industries characterized by easy entry and intense competition, the 
viability of some of the competitors may be sensitive to regulatory 
costs. Nonetheless, the Commission preliminarily believes that the 
overall marketplace for NMS securities would remain highly competitive, 
despite the costs associated with implementing proposed new Rule 613, 
even if those costs influence the entry or exit decisions of some 
individual broker-dealer firms.
    As discussed above in Sections V and VI, the Commission 
acknowledges that the proposal would entail significant costs of 
implementation. In particular, requiring national securities exchanges, 
national securities associations, and their members to capture the 
required information and provide it to the central repository in a 
uniform format, in particular information that is not currently 
captured under the existing audit trail or other regulatory 
requirements, would likely require significant one-time initial 
expenses to enhance or modify existing order handling, trading, and 
other systems. In addition, national securities exchanges and national 
securities associations would need to enhance or create new 
surveillance procedures to use the consolidated audit trail 
information. Preliminarily, the Commission does not believe that these 
implementation expenses would impose an undue burden on competition 
among SROs or among other market participants. The Commission 
preliminarily believes that the requirements associated with the 
proposed Rule are necessary and appropriate, and would apply uniformly 
to all national securities exchanges, national securities associations 
and their members, and thus would not result in an undue burden on 
competition.
    As discussed above in Section II, the approach of proposed new Rule 
613 would advance the purposes of the Exchange Act in a number of 
significant ways. The Commission preliminarily believes that proposed 
Rule 613 should aid each of the exchanges and FINRA in carrying out its 
statutory obligation to be organized and have the capacity to comply, 
and enforce compliance by its members, with its rules, and with the 
federal securities laws, rules, and regulations. Likewise, the 
Commission believes that proposed Rule 613 should aid the Commission in 
fulfilling its statutory obligation to oversee the exchanges and 
associations, and to enforce compliance by the members of

[[Page 32604]]

exchanges and associations with the respective exchange's or 
association's rules, and the federal securities laws and regulations. 
The proposed consolidated audit trail also would aid the Commission in 
its efforts to limit the manipulation of security prices, and to limit 
the use of manipulative or deceptive devices in the purchase or sale of 
a security. By potentially decreasing the opportunities for illegal 
activity and market manipulation, the proposed Rule should promote fair 
competition among market participants on the basis of effective 
regulation. Further, by imposing uniform audit trail requirements on 
all SROs and their members, and thus removing any incentive to compete 
based on regulation (or lack thereof), the Commission preliminarily 
believes that the proposed Rule would allow SROs and their members to 
more effectively compete on other terms such as the services provided, 
price, and available liquidity.
    Based on the analysis above, the Commission preliminarily believes 
that the proposal would not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. However, we seek comment on the impact of the proposed Rule on 
competition. The Commission requests comment on what, if any, would be 
the impact of the proposed Rule on competition among the exchanges and 
other non-exchange market centers. If commenters believe there would be 
an impact on competition, please explain and quantify the costs or 
benefits of such impact. For example, as noted above, exchanges would 
have access through the central repository to trading information about 
their competitors' customers. Do commenters believe that access to this 
information would have an impact on competition among exchanges? If so, 
please explain what the potential impact could be, and whether you 
believe that such impact would be an adverse. If so, please further 
address what, if any, steps the Commission should take in the proposed 
Rule to address such concerns.

B. Capital Formation

    As discussed above in Section II, proposed Rule 613 is intended to 
enhance the ability of the SROs and the Commission to more efficiently 
and in a more timely manner monitor trading in NMS securities across 
all markets and market participants, which should further the ability 
of the SROs and the Commission staff to effectively enforce SRO rules 
and federal securities laws, rules and regulations. For example, the 
proposed consolidated audit trail would ensure that all orders are 
tracked from origination to execution or cancellation. Further, the 
consolidated audit trail would provide information on any modifications 
or routing decisions made with regard to an order. The Commission 
preliminarily believes that the proposed audit trail information would 
greatly enhance the ability of its staff to effectively monitor and 
surveil the securities markets. This enhanced ability of the SROs and 
Commission staff to enforce the federal securities laws, rules, and 
regulations should help ensure that market participants that engage in 
fraudulent or manipulative activities are identified more swiftly, 
which should deter future attempts to do the same. In general, the 
faster fraudulent or manipulative activity is identified and action is 
taken, the more likely ill-gotten gains will remain available to pay 
penalties or compensate victims.
    The Commission preliminarily believes that by enhancing the SROs' 
and the Commission's ability to enforce the federal securities laws, 
rules and regulations, proposed Rule 613 could help maintain or 
increase investor confidence in the fairness of the securities markets. 
Investor confidence may increase as the potential for the detection of 
illegal activity is increased and the risk of investment loss due to 
undetected illegal activity decreases. Bolstering investor confidence 
in the fairness of the securities markets may increase the level of 
investment, which could promote capital formation to the extent that 
the increase is allocated efficiently. This would promote capital 
formation because as capital is better allocated, issuers with the most 
productive capital needs may be better able to raise capital.

C. Efficiency

    Proposed Rule 613 would require the creation and maintenance of a 
consolidated audit trail, which the Commission preliminarily believes 
would greatly enhance the ability of SRO staff to effectively monitor 
and surveil the securities markets, and thus detect illegal activity in 
a more timely manner, whether on one market or across markets. With an 
audit trail designed to help the SROs reconstruct and analyze time-
sequenced order and trading data, the SROs could more quickly 
investigate the nature and causes of unusual market movements or 
trading activity and initiate investigations and take regulatory 
actions where warranted. An increase in detected and prosecuted 
violations of the securities laws, rules, and regulations would likely 
act as deterrent to future violations. Likewise, the ability of the 
Commission to better understand unusual market activity, such as during 
a period of intense volatility, could lead to better oversight, or more 
focused regulation where warranted, of the causes of such activity. For 
example, the possibility of more prompt detection of illegal activity 
would likely deter future abusive or manipulative trading activity from 
being used to manipulate market prices to artificial levels or by 
accelerating a declining market in one or several securities. Thus, the 
Commission preliminarily believes that proposed Rule 613 would help to 
ensure that markets function efficiently. As a result, the Commission 
preliminarily believes that the proposed consolidated audit trail would 
help promote the efficient functioning of markets, which should help 
enhance the protection of investors and further the public interest.
    Further, the Commission preliminarily believes that the proposed 
Rule, by creating one central repository to which each national 
securities exchange, national securities association, and their members 
would be required to provide the same data in the same format, could 
reduce or eliminate the need for each individual SRO to have it own 
disparate requirements. Elimination of often inconsistent regulation on 
members would promote efficiency because members would no longer be 
required to submit disparate data to multiple regulators pursuant to 
multiple, and sometimes inconsistent, SRO and Commission rules.
    The Commission requests comment on all aspects of this analysis 
and, in particular, on whether the proposed consolidated audit trail 
would place a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act, as well as the effect 
of the proposal on efficiency, competition, and capital formation. The 
Commission also requests comment on the impact, if any, of the proposed 
Rule on investors' trading activities. Would the proposed Rule impact 
investors' incentives to engage in certain types of legal trading in 
NMS securities, or other products, on the exchanges or OTC markets that 
would be subject to the proposed Rule? If so, why, and what impact 
would that have on the competitiveness of the U.S. markets? Would the 
proposed Rule impact market participants' incentives to engage in 
certain types of illegal trading activity in products other than NMS 
securities or in other markets? If so, how so, and what if any steps 
should

[[Page 32605]]

the Commission take to address the expected changes in behavior? 
Commenters are requested to provide empirical data and other factual 
support for their views.

VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \404\ the Commission must advise the Office 
of Management and Budget as to whether the proposed regulation 
constitutes a ``major'' rule. Under SBREFA, a rule is considered 
``major'' where, if adopted, it results or is likely to result in: (1) 
An annual effect on the economy of $100 million or more (either in the 
form of an increase or a decrease); (2) a major increase in costs or 
prices for consumers or individual industries; or (3) significant 
adverse effect on competition, investment or innovation.
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    \404\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified 
in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 
601).
---------------------------------------------------------------------------

    The Commission requests comment on the potential impact of proposed 
Rule 613 on the economy on an annual basis, on the costs or prices for 
consumers or individual industries, and on competition, investment or 
innovation. Commenters are requested to provide empirical data and 
other factual support for their view to the extent possible.

IX. Initial Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (``RFA'') \405\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) \406\ of the Administrative Procedure 
Act,\407\ as amended by the RFA, generally requires the Commission to 
undertake a regulatory flexibility analysis of all proposed rules, or 
proposed rule amendments, to determine the impact of such rulemaking on 
``small entities.'' \408\
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    \405\ 5 U.S.C. 601 et seq.
    \406\ 5 U.S.C. 603(a).
    \407\ 5 U.S.C. 551 et seq.
    \408\ The Commission has adopted definitions for the term small 
entity for the purposes of Commission rulemaking in accordance with 
the RFA. Those definitions, as relevant to this proposed rulemaking, 
are set forth in Rule 0-10, 17 CFR 240.0-10. See Securities Exchange 
Act Release No. 18451 (January 28, 1982), 47 FR 5215 (February 4, 
1982) (File No. AS-305).
---------------------------------------------------------------------------

    Proposed Rule 613 of Regulation NMS would require the national 
securities exchanges and national securities associations to jointly 
develop and file with the Commission a NMS plan to implement and 
maintain a consolidated audit trail. Pursuant to such NMS plan, and 
rules that would be adopted by the SROs to implement the plan, national 
securities exchanges and national securities associations, as well as 
their members, would be required to provide data to a central 
repository to populate a consolidated audit trail.\409\
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    \409\ See proposed Rule 613(c) and supra Sections III.B. and 
III.D.
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A. Reasons for the Proposed Rule

    The Commission preliminarily believes that with today's electronic, 
interconnected markets, there is a heightened need for regulators to 
have efficient access to a more robust and effective cross-market order 
and execution tracking system. As discussed above, currently many of 
the national securities exchanges and FINRA have audit trail rules and 
systems to track information relating to orders received and executed, 
or otherwise handled, in their respective markets. While the 
information gathered from these audit trail systems aids the SRO and 
Commission staff in their regulatory responsibility to surveil for 
compliance with SRO rules and the federal securities laws and 
regulations, the Commission preliminarily believes that existing audit 
trails are limited in their scope and effectiveness in varying 
ways.\410\ In addition, while the SRO and Commission staff also 
currently receives information about orders and/or trades through the 
EBS system, Rule 17a-25,\411\ and from equity cleared reports, the 
information is limited, to varying degrees, in detail and scope.\412\
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    \410\ See supra Section II.A.
    \411\ 17 CFR 240.17a-25.
    \412\ See supra Sections I.A and I.B. for a description of the 
EBS system, Rule 17a-25, and equity cleared reports.
---------------------------------------------------------------------------

    The creation and implementation of a consolidated audit trail, as 
proposed, would enable regulators to better fulfill their regulatory 
responsibilities to monitor for and investigate potentially illegal 
activity in the NMS for securities in a more timely fashion, whether on 
one market or across markets. A consolidated audit trail also would 
enhance the ability of the Commission in investigating and preparing 
market reconstructions, and in understanding the causes of unusual 
market activity. Further, timely pursuit of potential violations can be 
important in seeking to freeze and recover any profits received from 
illegal activity.

B. Objectives and Legal Basis

    Each national securities exchange and national securities 
association must be organized and have the capacity to comply, and 
enforce compliance by its members, with its rules, and with the federal 
securities laws, rules, and regulations.\413\ Likewise, the Commission 
oversees the exchanges and associations,\414\ and enforces compliance 
by the members of exchanges and associations with the respective 
exchange's or association's rules, and the federal securities laws and 
regulations.\415\ The Commission preliminarily believes that the 
exchanges, FINRA and the Commission itself could more effectively and 
efficiently fulfill these statutory obligations to oversee and regulate 
the NMS if the SROs and the Commission had direct access to more 
robust, and timely, order and execution information across all markets.
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    \413\ See, e.g., Sections 6(b)(1), 19(g)(1) and 15A(b)(2) of the 
Exchange Act, 15 U.S.C. 78(f)(b)(1), 78s(g)(1), and 78o-3(b)(2).
    \414\ See, e.g., Sections 2, 6(b), 15A(b), and 19(h)(1) of the 
Exchange Act, 15 U.S.C. 78(b), 15 U.S.C. 78(f)(6), 15 U.S.C. 78o-
3(b), and 15 U.S.C. 78(h)(1).
    \415\ See, e.g., 19(h)(1) of the Exchange Act, 15 U.S.C. 
78(h)(1).
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    The Commission is proposing Rule 613 under the authority set forth 
in Exchange Act Sections 2, 3(b), 5, 6, 11, 11A, 15, 15A, 17(a) and 
(b), 19, 23(a), and 36 thereof, 15 U.S.C. 78b, 78c(b), 78e, 78f, 78k-1, 
78o, 78o-3, 78q(a) and (b), 78s, 78w(a), and 78mm.

C. Small Entities Subject to the Proposed Rule

1. National Securities Exchanges and National Securities Associations
    The proposed Rule would apply to national securities exchanges 
registered with the Commission under Section 6 of the Exchange Act and 
national securities associations registered with the Commission under 
Section 15A of the Exchange Act. None of the national securities 
exchanges registered under Section 6 of the Exchange Act or national 
securities associations registered with the Commission under Section 
15A of the Exchange Act that would be subject to the proposed Rule are 
``small entities'' for purposes of the RFA.\416\
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    \416\ See 17 CFR 240.0-10(e). Paragraph (e) of Rule 0-10 states 
that the term ``small business,'' when referring to an exchange, 
means any exchange that has been exempted from the reporting 
requirements of Rule 601 of Regulation NMS, 17 CFR 242.601, and is 
not affiliated with any person (other than a natural person) that is 
not a small business or small organization as defined in Rule 0-10. 
Under this standard, none of the exchanges subject to the proposed 
Rule is a ``small entity'' for the purposes of the RFA. FINRA is not 
a small entity as defined by 13 CFR 121.201.
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2. Broker-Dealers
    Proposed Rule 613(g) would apply to all broker-dealers that are 
members of a national securities exchange or national securities 
association. Commission rules

[[Page 32606]]

generally define a broker-dealer as a small entity for purposes of the 
Exchange Act and the Regulatory Flexibility Act if the broker-dealer 
had a total capital of less than $500,000 on the date in the prior 
fiscal year as of which its audited financial statements were prepared, 
and it is not affiliated with any person (other than a natural person 
that is not a small entity).\417\
---------------------------------------------------------------------------

    \417\ See 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    The Commission estimates that as of December 31, 2008, there were 
approximately 890 Commission-registered broker-dealers that would be 
considered small entities for purposes of the statute. Each of these 
broker-dealers, assuming that they are all members of one or more 
national securities exchange or FINRA, would be required to comply with 
the proposed Rule.
D. Reporting, Record Keeping, and Other Compliance Requirements
    Proposed Rule 613(g)(2) would impose new reporting and record 
keeping requirements on small broker-dealers. While certain elements of 
order and execution information that such small broker-dealers would be 
required to collect and submit to the central repository are already 
required to be maintained by broker-dealers pursuant to Rules 17a-3 and 
17a-25 under the Exchange Act or the SRO audit trail rules, the 
proposed Rule would require the collection of additional information 
that is not required to be collected under these rules. Further, small 
broker-dealers would be responsible for complying with the proposed 
Rule's requirements for reporting to the central repository the 
required order and transaction data.
    The proposed Rule would require that most of the information 
collected be reported on a real time basis, rather than on an ``as 
requested'' basis, and that all required information be submitted in a 
uniform format. Accordingly, the Commission preliminarily believes that 
even those small broker-dealers that already have systems in place for 
submitting order and transaction information to regulators upon 
request, or to comply with existing SRO audit trail rules, would need 
to make modifications to their existing order handling and trading 
systems to comply with the proposed Rule, or rely on outside vendors to 
provide a functionality that would provide information to the central 
repository.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    As stated above, broker-dealers are subject to record keeping and 
reporting requirements under Rules 17a-3 and 17a-25 under the Exchange 
Act. Rule 17a-3 requires that broker-dealers maintain records that 
would capture some of the same information required to be collected and 
submitted pursuant to the proposed Rule.\418\ Also, as part of the 
Commission's existing EBS system, pursuant to Rule 17a-25 under the 
Exchange Act, the Commission requires registered broker-dealers to keep 
records of some of the information that would be captured by proposed 
Rule 613.\419\
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    \418\ See 17 CFR 240.17a-3. Pursuant to Rule 17a-3, broker-
dealers are, for example, required to maintain the following 
information that would be captured by the proposed rule: Customer 
name and address; time an order was received; and price of 
execution.
    \419\ See 17 CFR 240.17a-25. Pursuant to Rule 17a-25, broker-
dealers are, for example, required to maintain the following 
information with respect to customer orders that would be captured 
by the proposed Rule, and provide it to the Commission upon request: 
Date on which the transaction was executed; account number; 
identifying symbol assigned to the security; transaction price; the 
number of shares or option contracts traded and whether such 
transaction was a purchase, sale, or short sale, and if an option 
transaction, whether such was a call or put option; the clearing 
house number of such broker or dealer and the clearing house numbers 
of the brokers or dealers on the opposite side of the transaction; 
prime broker identifier; the customer's name and address; the 
customer's tax identification number; and other related account 
information.
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    However, data collected pursuant to Rules 17a-3 and 17a-25 is 
limited in scope and is provided to the Commission only upon request. 
The proposed Rule would require the collection of significantly more 
information \420\ and would require that most of the information about 
orders and executions be provided to the central repository on a real 
time basis, not merely be stored and provided upon request. Thus, the 
Commission preliminarily believes that while these Federal rules 
overlap with certain requirements of the proposed Rule, the scope and 
purpose of the proposed Rule is more expansive than what is currently 
required and will more efficiently provide regulators with the 
information needed to effectively surveil trading activity across 
markets.
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    \420\ Such additional information would include: A unique 
customer identifier for each customer; a unique identifier that 
would attach to the order at the time the order is received or 
originated by the member and remain with the order through the 
process of routing, modification, cancellation, and execution (in 
whole or in part); a unique identifier of the broker-dealer 
receiving or originating the order; the unique identifier of the 
branch office and registered representative receiving or originating 
the order; the date on which the order is routed; time at which the 
order is routed (in milliseconds); and if the order is executed, in 
whole or in part, the account number for any subaccounts to which 
the execution is allocated; the unique order identifier of any 
contra-side order(s); and the amount of a commission, if any, paid 
by the customer, and the unique identifier of the broker-dealer(s) 
to whom the commission is paid.
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F. Significant Alternatives

    Pursuant to 3(a) of the RFA, the Commission must consider the 
following types of alternatives: (1) The establishment of differing 
compliance or reporting requirements or timetables that take into 
account the resources available to small entities; (2) clarification, 
consolidation, or simplification of compliance and reporting 
requirements under the Rule for small entities; (3) the use of 
performance rather than design standards; and (4) and exemption from 
coverage of the proposed Rule, or any part thereof, for small entities.
    The Commission has considered whether it would more be more cost 
effective to enhance existing systems to achieve the proposed Rule's 
objective, rather than create a central repository. For example, the 
Commission considered expanding the scope of the information collected 
by existing audit trails, the EBS system, and/or Rule 17a-25, but 
determined that this approach would not result in the creation of a 
comprehensive consolidated audit trail. Under such an approach, SROs 
would still need to check multiple repositories of data to gather 
information about trading activity occurring across markets. Further, 
the goal of capturing data in a uniform format would be complicated if 
data were collected by multiple repositories. In addition, this 
approach would not resolve concerns over how long it takes to obtain 
data when it is not available in real time, but only required to be 
provided upon request. Without the centralization of data in a uniform 
electronic format, the Commission preliminarily believes that the goals 
of the proposed Rule could not be achieved.
    The Commission preliminarily believes that proposing a new uniform 
audit trail rule that would apply equally across all SROs and their 
members would be more efficient and effective than requiring each SRO 
to separately amend and enhance its existing order audit trail or EBS 
rules and systems, and amending Rule 17a-25. The scope of the proposed 
audit trail--requiring each member and SRO to report the same 
information for each order, for each reportable event, in a uniform 
format, in real time, across all markets--is fundamentally different 
than what is collected under existing order audit trails, the EBS 
system, and Rule 17a-25.
    The Commission also has considered allowing certain small broker-
dealers to submit certain trading data in a manual,

[[Page 32607]]

rather than an electronic, format.\421\ However, the Commission 
preliminarily does not believe that the intent and objectives of 
proposed Rule 613 could be achieved if small broker-dealers are subject 
to differing compliance or reporting requirements, such as manual 
reporting of data, or timetables. The Commission preliminarily believes 
that to be effective the consolidated audit trail should contain order 
and execution information from all broker-dealers, including small 
broker-dealers, in a uniform electronic format. Without this 
information, the SROs and the Commission would not have a complete and 
timely cross-market audit trail to utilize in their regulatory 
oversight of small broker-dealers, their customers, and the securities 
markets. Further, the Commission preliminarily believes that the 
timetable contained in the proposed Rule, which would give brokers-
dealers two years after effectiveness of the NMS plan to implement the 
proposed requirements to collect and report the required information to 
the central repository, would allow small broker-dealers sufficient 
time to modify existing systems, or procure third party functionality, 
to comply with the proposed Rule.\422\
---------------------------------------------------------------------------

    \421\ See 17a-25 Adopting Release, supra note 20, at 35839-
35840.
    \422\ See supra notes 326-330 and accompanying text and notes 
356-358 and accompanying text.
---------------------------------------------------------------------------

    Further, the Commission preliminarily believes that it has drafted 
the proposed Rule to be as straightforward as possible to achieve its 
objectives. Any simplification, consolidation or clarification of the 
Rule should occur for all entities, not just small broker-dealers. The 
Commission does not propose to dictate for entities of any size any 
particular design standards (e.g., technology) that must be employed to 
achieve the objectives of the proposed Rule. However, in order to 
provide consistent, comparable data to the central repository, the 
nature of the information collected is a design standard.
    The Commission would be able to rely on its exemptive authority 
under Section 36 of the Exchange Act to grant relief, when necessary, 
to small broker-dealers from the requirements of the proposed Rule. The 
Commission preliminarily believes that a wholesale exemption from the 
proposed Rule for small broker-dealers, however, would make it harder 
for the Commission and SROs to recognize the anticipated benefits of 
the consolidated audit trail.

G. Solicitation of Comments

    The Commission invites commenters to address whether the proposed 
Rule would have a significant economic impact on a substantial number 
of small entities, and, if so, what would be the nature of any impact 
on small entities. The Commission requests that commenters provide 
empirical data to support the extent of such impact.

X. Statutory Authority

    Pursuant to the Exchange Act and particularly, Sections 2, 3(b), 5, 
6, 11A, 15, 15A, 17(a) and (b), 19, and 23(a) thereof, 15 U.S.C. 78b, 
78c(b), 78e, 78f, 78k-1, 78o, 78o-3, 78q(a) and (b), 78s and 78w(a), 
the Commission proposes Rule 613 of Regulation NMS, as set forth below.

Text of Proposed Rule

List of Subjects in 17 CFR Part 242

    Brokers, Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, Title 17, Chapter II, of the Code 
of Federal Regulations is proposed to be amended as follows.

PART 242--REGULATIONS M, SHO, ATS, AC, AND NMS AND CUSTOMER MARGIN 
REQUIREMENTS FOR SECURITY FUTURES

    1. The authority citation for part 242 continues to read as 
follows:

    Authority:  15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 
80a-37.

    2. Add Sec.  242.613 to read as follows:

Sec.  242.613  Consolidated Audit Trail.

    (a) Creation of a National Market System Plan Governing a 
Consolidated Audit Trail.
    (1) Each national securities exchange and national securities 
association shall jointly file on or before [90 days from approval of 
this rule] a national market system plan to govern the creation, 
implementation, and maintenance of a consolidated audit trail and 
central repository as required by this section.
    (2) The national market system plan, or any amendment thereto, 
filed pursuant to this section shall be filed with the Commission 
pursuant to Sec.  242.608.
    (3) The national market system plan submitted pursuant to this 
section shall require each national securities exchange and national 
securities association to:
    (i) By two months after effectiveness of the national market system 
plan jointly (or under the governance structure described in the plan) 
select a person to be the plan processor;
    (ii) By four months after effectiveness of the national market 
system plan synchronize their business clocks and by four months after 
effectiveness of the national market system plan require members of 
each such exchange and association to synchronize their business clocks 
in accordance with paragraph (d) of this section;
    (iii) By one year after effectiveness of the national market system 
plan provide to the central repository the data specified in paragraph 
(c) of this section;
    (iv) By fourteen months after effectiveness of the national market 
system plan implement a new or enhanced surveillance system(s) as 
required by paragraph (f) of this section; and
    (v) By two years after effectiveness of the national market system 
plan require members of each such exchange and association to provide 
to the central repository the data specified in paragraph (c) of this 
section.
    (4) Each national securities exchange and national securities 
association shall be a sponsor of the national market system plan 
submitted pursuant to this section and approved by the Commission.
    (5) No national market system plan filed pursuant to this section, 
or any amendment thereto, shall become effective unless approved by the 
Commission or otherwise permitted in accordance with the procedures set 
forth in Sec.  242.608.
    (b) Operation and Administration of the National Market System 
Plan.
    (1) The national market system plan submitted pursuant to this 
section shall include a governance structure to ensure fair 
representation of the plan sponsors, and administration of the central 
repository, including the selection of the plan processor.
    (2) The national market system plan submitted pursuant to this 
section shall include a provision addressing the requirements for the 
admission of new sponsors of the plan and the withdrawal of existing 
sponsors from the plan.
    (3) The national market system plan submitted pursuant to this 
section shall include a provision addressing the percentage of votes 
required by the plan sponsors to effectuate amendments to the plan.
    (4) The national market system plan submitted pursuant to this 
section shall include a provision addressing the manner in which the 
costs of operating the central repository will be allocated among the 
national securities exchanges

[[Page 32608]]

and national securities associations that are sponsors of the plan, 
including a provision addressing the manner in which costs will be 
allocated to new sponsors to the plan.
    (5) The national market system plan submitted pursuant to this 
section shall require the appointment of a Chief Compliance Officer to 
regularly review the operation of the central repository to assure its 
continued effectiveness in light of market and technological 
developments, and make any appropriate recommendations for enhancements 
to the nature of the information collected and the manner in which it 
is processed.
    (c) Data Collection. (1) The national market system plan submitted 
pursuant to this section shall provide for an accurate, time-sequenced 
record of orders beginning with the receipt or origination of an order 
by a member of a national securities exchange or national securities 
association, and further documenting the life of the order through the 
process of routing, modification, cancellation, and execution (in whole 
or in part) of the order.
    (2) The national market system plan submitted pursuant to this 
section shall require each national securities exchange, national 
securities association, and member to collect and provide to the 
central repository the information required by paragraph (c)(7) of this 
section in a uniform electronic format.
    (3) The national market system plan submitted pursuant to this 
section shall require each national securities exchange, national 
securities association, and member to collect and provide to the 
central repository the information required by paragraphs (c)(7)(i) 
through (v) of this section on a real time basis.
    (4) The national market system plan submitted pursuant to this 
section shall require each national securities exchange, national 
securities association, and member to collect and provide to the 
central repository the information required by paragraphs (c)(7)(vi) 
and (vii) of this section promptly after the national securities 
exchange, national securities association, or member receives the 
information, but in no instance later than midnight of the day that the 
reportable event occurred or the national securities exchange, national 
securities association, or member receives such information.
    (5) The national market system plan submitted pursuant to this 
section shall require each national securities exchange and its members 
to collect and provide to the central repository the information 
required by paragraph (c)(7) of this section for each NMS security 
registered or listed for trading on such exchange or admitted to 
unlisted trading privileges on such exchange.
    (6) The national market system plan submitted pursuant to this 
section shall require each national securities association and its 
members to collect and provide to the central repository the 
information required by paragraph (c)(7) of this section for each NMS 
security for which transaction reports are required to be submitted to 
the association.
    (7) The national market system plan submitted pursuant to this 
section shall require each national securities exchange, national 
securities association, and any member of such exchange or association 
to collect and electronically provide to a central repository details 
for each order and each reportable event, including, but not limited 
to, the following information:
    (i) For the original receipt or origination of the order:
    (A) Information of sufficient detail to identify the customer;
    (B) A unique customer identifier for each customer;
    (C) Customer account information;
    (D) A unique identifier that will attach to the order at the time 
the order is received or originated by the member and remain with the 
order through the process of routing, modification, cancellation, and 
execution (in whole or in part);
    (E) The unique identifier of the broker-dealer receiving or 
originating the order;
    (F) The unique identifier of the branch office and registered 
representative receiving or originating the order;
    (G) Date of order receipt or origination;
    (H) Time of order receipt or origination (in milliseconds); and
    (I) Material terms of the order.
    (ii) For the routing of an order, the following information:
    (A) The unique order identifier;
    (B) Date on which the order is routed;
    (C) Time at which the order is routed (in milliseconds);
    (D) The unique identifier of the broker-dealer or national 
securities exchange routing the order;
    (E) The unique identifier of the broker-dealer or national 
securities exchange receiving the order;
    (F) If routed internally at the broker-dealer, the identity and 
nature of the department or desk to which an order is routed; and
    (G) Material terms of the order.
    (iii) For the receipt of an order, the following information:
    (A) The unique order identifier;
    (B) Date on which the order is received;
    (C) Time at which the order is received (in milliseconds);
    (D) The unique order identifier of the broker-dealer or national 
securities exchange receiving the order;
    (E) The unique identifier of the broker-dealer or national 
securities exchange routing the order; and
    (F) Material terms of the order.
    (iv) If the order is modified or cancelled, the following 
information:
    (A) Date the modification or cancellation is received or 
originated;
    (B) Time the modification or cancellation is received or originated 
(in milliseconds);
    (C) Price and remaining size of the order, if modified;
    (D) Other changes in material terms of the order, if modified; and
    (E) Identity of the person giving the modification or cancellation 
instruction.
    (v) If the order is executed, in whole or in part, the following 
information:
    (A) The unique order identifier;
    (B) Date of execution;
    (C) Time of execution (in milliseconds);
    (D) Execution capacity (principal, agency, riskless principal);
    (E) Execution price and size;
    (F) The unique identifier of the national securities exchange or 
broker-dealer executing the order; and
    (G) Whether the execution was reported pursuant to an effective 
transaction reporting plan or the Options Price Reporting Authority 
Plan.
    (vi) If the order is executed, in whole or in part:
    (A) The account number for any subaccounts to which the execution 
is allocated (in whole or part);
    (B) The unique identifier of the clearing broker or prime broker, 
if applicable;
    (C) The unique order identifier of any contra-side order(s);
    (D) Special settlement terms, if applicable;
    (E) Short sale borrow information and identifier; and
    (F) The amount of a commission, if any, paid by the customer, and 
the unique identifier of the broker-dealer(s) to whom the commission is 
paid.
    (vii) If the execution is cancelled, a cancelled trade indicator.
    (8) All plan sponsors and their members shall use the same unique 
customer identifier and unique broker-dealer identifier for each 
customer and broker-dealer.
    (d) Clock Synchronization. The national market system plan 
submitted pursuant to this section shall require

[[Page 32609]]

each national securities exchange, national securities association, and 
member of such exchange or association subject to this section to:
    (1) Synchronize on its business clocks that are used for the 
purposes of recording the date and time of any reportable event that 
must be reported pursuant to this section to the time maintained by the 
National Institute of Standards and Technology, consistent with 
industry standards; and
    (2) Evaluate annually the synchronization standard to determine 
whether it should be shortened, consistent with changes in industry 
standards.
    (e) Central Repository.
    (1) The national market system plan submitted pursuant to this 
section shall provide for the creation and maintenance of a central 
repository. Such central repository shall be responsible for the 
receipt, consolidation, and retention of all data submitted pursuant to 
this section.
    (2) Each national securities exchange, national securities 
association, and the Commission shall have access to the central 
repository, including all systems operated by the central repository, 
and access to and use of the data reported to and consolidated by the 
central repository under paragraph (c) of this section, for the purpose 
of performing its respective regulatory and oversight responsibilities 
pursuant to the federal securities laws, rules, and regulations. The 
national market system plan submitted pursuant to this section shall 
provide that such access to and use of such data by each national 
securities exchange, national securities association, and the 
Commission for the purpose of performing its regulatory and oversight 
responsibilities pursuant to the federal securities laws, rules, and 
regulations shall not be limited.
    (3) The national market system plan submitted pursuant to this 
section shall include a provision requiring the creation and 
maintenance by the central repository of a method of access to the 
consolidated data that includes search and reporting functions.
    (4) The national market system plan submitted pursuant to this 
section shall include policies and procedures, including standards, to 
be used by the plan processor to:
    (i) Ensure the security and confidentiality of all information 
submitted to the central repository. All plan sponsors and their 
employees, as well as all employees of the central repository, shall 
agree to use appropriate safeguards to ensure the confidentiality of 
such data and shall agree not to use such data for any purpose other 
than surveillance and regulatory purposes. Nothing in this paragraph 
(i) shall be construed to prevent a plan sponsor from using the data 
that it submits to the central repository for regulatory, surveillance, 
commercial, or other purposes as otherwise permitted by applicable law, 
rule, or regulation;
    (ii) Ensure the timeliness, accuracy, and completeness of the data 
provided to the central repository pursuant to paragraph (c) of this 
section;
    (iii) Require the rejection of data provided to the central 
repository pursuant to paragraph (c) of this section that does not meet 
these validation parameters and the re-transmission of corrected data; 
and
    (iv) Ensure the accuracy of the consolidation by the plan processor 
of the data provided to the central repository pursuant to paragraph 
(c) of this section.
    (5) The national market system plan submitted pursuant to this 
section shall require the central repository to collect and retain on a 
current and continuing basis and in a format compatible with the 
information collected pursuant to paragraph (c)(7) of this section;
    (i) The national best bid and national best offer for each NMS 
security;
    (ii) Transaction reports reported pursuant to an effective 
transaction reporting plan filed with the Commission pursuant to, and 
meeting the requirements of, Sec.  242.601; and
    (iii) Last sale reports reported pursuant to the Options Price 
Reporting Authority Plan filed with the Commission pursuant to, and 
meeting the requirements of, Sec.  242.608.
    (6) The national market system plan submitted pursuant to this 
section shall require the central repository to retain the information 
collected pursuant to paragraphs (c)(7) and (e)(5) of this section in a 
convenient and usable standard electronic data format that is directly 
available and searchable electronically without any manual intervention 
for a period of not less than five years. The information shall be 
available immediately, or if immediate availability cannot reasonably 
and practically be achieved, any search query must begin operating on 
the data not later than one hour after the search query is made.
    (f) Surveillance. Every national securities exchange and national 
securities association subject to this section shall develop and 
implement a surveillance system, or enhance existing surveillance 
systems, reasonably designed to make use of the consolidated 
information contained in the consolidated audit trail.
    (g) Compliance by Members. (1) Each national securities exchange 
and national securities association shall file with the Commission 
pursuant to section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)) and Sec.  
240.19b-4 on or before [120 days from approval of this rule] a proposed 
rule change to require its members to comply with the requirements of 
this section and the national market system plan submitted pursuant to 
this section and approved by the Commission of which the national 
securities exchange or national securities association is a sponsor.
    (2) Each member of a national securities exchange or national 
securities association that is a sponsor of the national market system 
plan submitted pursuant to this section and approved by the Commission 
shall collect and submit to the central repository the information 
required by paragraph (c) of this section and shall comply with the 
synchronization requirements of paragraph (d) of this section.
    (3) The national market system plan submitted pursuant to this 
section shall include a provision that by subscribing to and submitting 
the plan to the Commission, each national securities exchange and 
national securities association that is a sponsor to the plan agrees to 
enforce compliance by its members with the provisions of the plan.
    (4) The national market system plan submitted pursuant to this 
section shall include a mechanism to ensure compliance with the 
requirements of the plan by the members of a national securities 
exchange or national securities association that is a sponsor of the 
national market system plan submitted pursuant to this section and 
approved by the Commission.
    (h) Compliance by National Securities Exchanges and National 
Securities Associations. (1) Each national securities exchange and 
national securities association shall comply with the provisions of the 
national market system plan submitted pursuant to this section and 
approved by the Commission of which it is a sponsor.
    (2) Any failure by a national securities exchange or national 
securities association to comply with the provisions of the national 
market system plan submitted pursuant to this section and approved by 
the Commission of which it is as sponsor shall be considered a 
violation of this section.
    (3) The national market system plan submitted pursuant to this 
section shall include a mechanism to ensure compliance by the sponsors 
of the plan with the requirements of the plan.

[[Page 32610]]

    (i) Other Securities and Other Types of Transactions. The national 
market system plan submitted pursuant to this section shall include a 
provision requiring each national securities exchange and national 
securities association to jointly provide to the Commission within two 
months after effectiveness of the national market system plan a 
document outlining how such exchanges and associations would propose to 
incorporate into the consolidated audit trail information with respect 
to equity securities that are not NMS securities, debt securities, 
primary market transactions in NMS stocks, primary market transactions 
in equity securities that are not NMS securities, and primary market 
transactions in debt securities, including details for each order and 
reportable event that would be required to be provided, which market 
participants would be required to provide the data, an implementation 
timeline, and a cost estimate.
    (j) Definitions.
    (1) The term customer shall mean:
    (i) The beneficial owner(s) of the account originating the order; 
and
    (ii) The person exercising investment discretion for the account 
originating the order, if different from the beneficial owner(s);
    (2) The term customer account information shall include, but not be 
limited to, account number, account type, customer type, date account 
opened, and large trader identifier (if applicable).
    (3) The term material terms of the order shall include, but not be 
limited to, the NMS security symbol, security type, price (if 
applicable), size (displayed and non-displayed), side (buy/sell), order 
type; if a sell order, whether the order is long, short, short exempt; 
if a short sale, the locate identifier, open/close indicator, time in 
force (if applicable), whether the order is solicited or unsolicited, 
whether the account has a prior position in the security; if the order 
is for a listed option, option type (put/call), option symbol or root 
symbol, underlying symbol, strike price, expiration date, and open/
close, and any special handling instructions.
    (4) The term order shall mean:
    (i) Any order received by a member of a national securities 
exchange or national securities association from any person;
    (ii) Any order originated by a member of a national securities 
exchange or national securities association; or
    (iii) Any bid or offer.
    (5) The term reportable event shall include, but not be limited to, 
the receipt, origination, modification, cancellation, routing, and 
execution (in whole or in part).

    Dated: May 26, 2010.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-13129 Filed 6-4-10; 8:45 am]
BILLING CODE 8010-01-P