\354\ 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 a limit order not be displayed, or that a block size
limit order 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).
    \355\ 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).
    \356\ For cancellations or modifications, 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).
    \357\ ``Account type'' refers to the type of beneficial owner of
the account for which the order was received or originated. Examples
include institutional customer, individual customer, employee
account, market making, and proprietary. See FINRA, OATS Reporting
Technical Specifications, at 4-2, available at http://www.finra.org/sites/default/files/OATSTechSpec_01112016.pdf.
---------------------------------------------------------------------------

    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; \358\ (2) order receipt
time; \359\ (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.\360\
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    \358\ 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. See, e.g., BATS Exchange,
Inc. (``BATS'') Rule 20.7; BOX Options Exchange LLC (``BOX'')
Chapter V, Section 15; CBOE Chapter VI, Rules 6.24 and 6.51; NASDAQ
Options Market (``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 NASDAQ OMX PHLX LLC (``Phlx'') Rules 1063 and 1080.
    \359\ The required information also includes identification of
the terminal or individual completing the order ticket. See id.
    \360\ See id.
---------------------------------------------------------------------------

    Although SROs that operate exchanges collect much of their audit
trail information directly from their internal systems, broker-dealers
also have the responsibility to report regulatory data to SRO audit
trails. Some broker-dealers perform nearly all of these data reporting
requirements in-house, whereas others contract with service bureaus to
accomplish this data reporting.\361\ This reporting can represent a
significant burden on broker-dealers.
---------------------------------------------------------------------------

    \361\ See Section IV.F.1.c(2), infra, for a discussion of how
broker-dealers decide whether or not to outsource their regulatory
reporting.
---------------------------------------------------------------------------

    Audit trail data have become more useful to regulators over time.
As noted above, FINRA expanded OATS from covering only NASDAQ listed
securities to include OTC equity securities and all NMS stocks.\362\
Commission Staff understands that FINRA has also begun collecting
additional SRO audit trail data, provided voluntarily from most
exchanges, to supplement OATS data. In addition, NYSE, NYSE Amex LLC
(n/k/a ``NYSE MKT LLC'') (``NYSE Amex''), and NYSE ARCA, Inc. (``NYSE
Arca'') eliminated their OTS audit trail requirements and replaced them
to coordinate with the OATS requirements, so that members who are also
members of either FINRA or NASDAQ (and therefore subject to OATS
requirements) are able to satisfy their reporting obligations by
meeting the OATS requirements.\363\ As a result of all of these
changes, the combined data from these different audit trails \364\ now
cover most order events in equities.
---------------------------------------------------------------------------

    \362\ See supra note 351.
    \363\ See Securities Exchange Act Release No. 65523 (October 7,
2011), 76 FR 64154 (October 17, 2011) (concerning NYSE); Securities
Exchange Act Release No. 65524 (October 7, 2011), 76 FR 64151
(October 17, 2011) (concerning NYSE Amex); Securities Exchange Act
Release No. 65544 (October 12, 2011), 76 FR 64406 (October 18, 2011)
(concerning NYSE Arca).
    \364\ Other SRO audit trails have varied reporting requirements.
Some exchanges have detailed audit trail data submission
requirements for their members covering order entry, transmittal,
and execution. See CHX Article 11, Rule 3(b); NASDAQ Rules 6950-6958
(substantially similar to the OATS rules); NASDAQ OMX BX Rules 6950-
6958 (substantially similar to OATS rules). The audit trail rules of
the other exchanges incorporate only standard books and records
requirements in accordance with Section 17 of the Exchange Act, 15
U.S.C. 78q. See, e.g., NSX Chapter VI, Rule 4.1.; BATS Chapter IV,
Rule 4.1; CBOE Rule 15.1 (applicable to CBOE Stock Exchange
(``CBSX'')); International Securities Exchange, LLC (``ISE'') Rule
1400; NYSE Arca Equities Rule 2.24. 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. Though not
an audit trail, the Large Options Position Report (``LOPR'') is also
a source of SRO data that is used for surveillance, examination, and
enforcement purposes by SRO and Commission staff. The data is
collected pursuant to FINRA Rule 2360(b)(5), Reporting of Options
Positions, under which each member must file a report for each
account in which they have an interest in a position of 200 or more
options contracts, on the same side of the market. Any increases or
decreases in this position must also be reported. The Options
Clearing Corporation (``OCC'') is the service provider for the
processing of these reports, which are used at will by the SROs for
surveillance purposes. The Commission also frequently uses LOPR for
enforcement investigations of insider trading and market
manipulation cases.
---------------------------------------------------------------------------

    SRO audit trail data is used for market reconstructions and market
analyses, and to inform policy decisions, both by the Commission and by
SROs. Regulators also use SRO audit trail data extensively for
surveillance, examinations, investigations, and other enforcement
functions. Current SRO market surveillance relies primarily on data
from the SRO audit trails, generated directly from the exchange servers
and from OATS. Likewise, SRO examinations and investigations pull
information from their own audit trails before seeking data from
others. Commission examinations and investigations also rely heavily on
SRO audit trails to start the process of tracing a particular trade
from its execution to the order initiations and customer information,
and the audit trails can be useful for manipulation investigations or
other regulatory activities that require analyses of microcap
securities trading activity. There are, however, limitations on SRO
audit trail data that reduce their usefulness to regulators. For
example, for the examinations mentioned above, Commission examination
Staff may undertake a laborious process of linking SRO audit trail data
with EBS data, because SRO audit trail data does not contain customer
information.\365\ These and other limitations are discussed in Section
IV.D.2.b, infra.
---------------------------------------------------------------------------

    \365\ See Section IV.D.2.b, infra.
---------------------------------------------------------------------------

(2) Equity and Option Cleared Reports
    The SROs and Commission also have access to equity and option
cleared reports. Clearing broker-dealers report their equity and option
cleared data on a daily basis and the NSCC and the OCC aggregate the
data across the market and generate the reports.\366\ The reports show
the number of trades and daily cleared trade and share volume, by
clearing member, for each equity and listed option security in which
transactions took place. Regulators can query these reports directly
through an internal online system that interfaces with the Depository
Trust and Clearing Corporation (``DTCC'') data by security name and
CUSIP number.\367\ The

originating source of the DTCC cleared equity data is the Securities
Information Automation Corporation (``SIAC'') and the originating
source of the cleared options data is the OCC.
---------------------------------------------------------------------------

    \366\ NSCC provides clearing, settlement, risk management,
central counterparty services and a guarantee of completion for
certain transactions for virtually all broker-to-broker trades
involving equities, corporate and municipal debt, American
depositary receipts, exchange-traded funds, and unit investment
trusts. See DTCC, About DTCC, NSCC, available at http://www.dtcc.com/about/businesses-and-subsidiaries/nscc.aspx. The OCC is
an equity derivatives clearing organization that is registered as a
clearing agency under Section 17A of the Act, 15 U.S.C. 78q-1, and
operates under the jurisdiction of both the Commission and the CFTC.
See OCC, About OCC, available at http://www.optionsclearing.com/about/corporate-information/what-is-occ.jsp.
    \367\ A CUSIP number is a unique alphanumeric identifier
assigned to a security and facilitates the clearance and settlement
of trades in the security. See SEC, Fast Answers, CUSIP Number,
available at www.sec.gov/answers/cusip.htm.
---------------------------------------------------------------------------

    Equity and option cleared reports provide a way for regulators to
directly access a dataset to see how much trading volume is accounted
for by a particular clearing broker. As such, these data are often used
at the beginning of an examination or investigation to start
identifying the market participants that may have additional data
needed to pinpoint a particular activity. But there are limitations on
these reports that reduce their usefulness to regulators. For example,
the information available on the reports is limited to the date, the
clearing firm, and the number of transactions cleared by each clearing
firm on each SRO. These and other limitations are discussed in Section
IV.D.2.b, infra.
(3) Electronic Blue Sheets
    Broker-dealers provide detailed data to regulators in the form of
EBS. The EBS data, provided pursuant to Rule 17a-25 under the Act,\368\
facilitate investigations by the SROs and Commission Staff,
particularly in the areas of insider trading and market manipulations.
The EBS system provides certain detailed execution information in its
electronic format \369\ upon request by SRO or Commission Staff. This
information often includes the employer of the beneficial owner of an
account,\370\ which can be important to insider trading investigations,
and in some cases, a tax identification number.\371\
---------------------------------------------------------------------------

    \368\ 17 CFR 240.17a-25. Rule 17a-25 codified the requirement
that broker-dealers submit to the Commission, upon request,
information on their customer and proprietary securities
transactions in an electronic format. The Rule 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.
    \369\ 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. See Rule 17a-25(a)(1), (b)(1)-(3), 17 CFR
240.17a-25(a)(1), (b)(1)-(3). 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. See Rule 17a-25(a)(2), 17 CFR 240.17a-25(a)(2);
see also infra note 372 and accompanying text (discussing additional
information on ``large traders'' reported through EBS).
    \370\ Employer information is required by some SRO EBS rules.
See, e.g., NYSE and FINRA Rule 8211. While employer information is
not required under Rule 17a-25, Commission staff sometimes request
and receive this information.
    \371\ Tax identification numbers are not required to be reported
in EBS for average price, allocation, riskless principal, foreign
accounts, and subaccounts.
---------------------------------------------------------------------------

    The EBS system also provides additional information on market
participants who meet the definition of ``large traders'' and have
self-identified to the Commission as required by Rule 13h-1.\372\ Large
traders who file Form 13H with the Commission are assigned a ``large
trader identification number'' by the Commission and must provide that
number to their brokers for inclusion in the EBS records that are
maintained by the clearing brokers. Rule 13h-1, subject to relief
granted by the Commission,\373\ requires that execution time be
captured (to the second) for certain categories of large traders. Large
trader data provide the Commission with a way to acquire information
about the activities of large traders and allow the activities of large
traders to be more readily aggregated across or partitioned by multiple
broker-dealers. Regulators generally use data from the EBS system
extensively in enforcement investigations, for which EBS data are
vital, particularly insider trading investigations. But again, there
are limitations on EBS data. For example, EBS data are cumbersome to
use for broad analyses, such as analysis and reconstruction of market
events, market analysis and research, and some examinations, because of
the fragmentation of the data. These and other limitations are
discussed in Section IV.D.2.b, infra.
---------------------------------------------------------------------------

    \372\ See Securities Exchange Act Release No. 64976 (July 27,
2011), 76 FR 46960 (August 3, 2011). A ``large trader'' is defined
as a person whose transactions in NMS securities equal or exceed 2
million shares or $20 million during any calendar day, or 20 million
shares or $200 million during any calendar month. SEC Rule 13h-1, 17
CFR 240.13h-1, requires those market participants who meet the
definition of ``large traders'' to comply with a number of
requirements, including filing Form 13H with the Commission to
receive a large trader identification number. Id.
    \373\ See Securities Exchange Act Release No. 76322 (October 30,
2015), 80 FR 68590 (November 5, 2015).
---------------------------------------------------------------------------

(4) Trade Blotters and Order Tickets
    Investment advisers and broker-dealers maintain data in the form of
order tickets and trade blotters that regulators can obtain on
request.\374\ Order tickets are in-house records maintained by
investment advisers and broker-dealers that provide order details,
including time stamps of order initiation and placement, special order
types, any special instructions for the order, and plans for the
allocation of shares and prices across accounts and subaccounts. Order
tickets also identify account owners. Commission Staff collects order
tickets regularly for examinations, and occasionally also for market
manipulation investigations.
---------------------------------------------------------------------------

    \374\ Rule 204-2 requires investment advisers to maintain a
memorandum of each order given by the investment adviser for the
purchase or sale of any security. 17 CFR 275.204-2(a)(3). Rule 17a-
3(a)(1) requires broker-dealers to maintain a trade blotter. 17 CFR
240.17a-3(a)(1).
---------------------------------------------------------------------------

    Broker-dealers maintain data in trade blotters that are similar to
EBS. However, the trade blotters also contain more information,
including the commissions paid in executing each order, time stamps of
when an order is received and when it is executed (and the number of
fills), and the pricing information for all executions in the
order.\375\ SROs use trade blotters in examinations of their members.
Commission Staff uses trade blotters frequently for examinations,
including in almost every broker-dealer, investment adviser, and hedge
fund examination, as well as for insider trading and market
manipulation investigations. Regulators use trade blotter data to
determine the order entry time and execution time for trades by a
particular customer in examinations and enforcement investigations.
Trade blotters are also the primary data source used in regulatory
investigations for which subaccount allocation information is important
for determining violative behavior, such as cherry-picking and front-
running cases. There are limitations on trade blotter and order ticket
data that reduce their usefulness to regulators, however. For example,
regulators lack direct access to these data; in order to acquire trade
blotter and order ticket data, regulators need to send a request to
each individual broker-dealer to obtain its data, which can be a
lengthy and cumbersome process. These and other limitations are
discussed in Section IV.D.2.b, infra.
---------------------------------------------------------------------------

    \375\ Regulators could also request a trade confirmation instead
of a trade blotter. A trade confirmation shows the customer, the
symbol, execution price, trade date, settlement date and commission.
A trade blotter is more detailed than a trade confirmation. A trade
blotter is what a firm itself records and the exact information
recorded varies by firm. Typically, regulators look to the trade
confirmation when they have questions about the veracity of a firm's
blotter, but generally prefer to request the trade blotter due to
its greater detail.

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

(5) Trading and Order Handling System Data
    Broker-dealers and exchanges also collect and maintain records of
activity in their order handling systems and internal matching
systems.\376\ This data may include order receipt, modification or
routing information not otherwise reported to SROs. Some elements of
these data exceed the scope of information captured in EBS, SRO audit
trail, trade blotter, or order ticket data; for example, SRO audit
trail data sometimes excludes market-making activity. But certain
market making activity is included in the data that broker-dealers and
exchanges are required to maintain pursuant to Section 17(a) of the Act
\377\ and Rule 17a-3 thereunder.\378\ Regulators use these trading and
order handling system data in investigations and examinations to
further analyze issues discovered during their analysis of data from
other sources. Like other current sources of data, there are
limitations on trading and order handling system data that reduce their
usefulness to regulators. For example, a lack of standardization
results in variations in trading and order handling system data across
broker-dealers. These and other limitations are discussed in Section
IV.D.2.b, infra.
---------------------------------------------------------------------------

    \376\ Internal matching systems of broker-dealers may include
Alternative Trading Systems (``ATSs'') or automated trading systems
that provide liquidity to received orders without interacting on a
registered exchange. The Commission understands that some broker-
dealers rely on their clearing firms to collect and maintain records
relating to routed orders on their behalf. Broker-dealers that
operate their own internal matching systems are more likely to
collect and maintain their own records.
    \377\ 15 U.S.C. 78q(a).
    \378\ 17 CFR 240.17a-3. For example, market makers are only
required to report information on orders that are executed.
---------------------------------------------------------------------------

(6) Public Data
    Exchanges and SROs also make data available to the public, in some
cases on a commercially-available basis,\379\ that regulators could
access for their regulatory activities. One type of public data is
``consolidated'' data feeds that are disseminated by registered
Securities Information Processors (``SIPs'') pursuant to joint SRO
plans.\380\ For a fee, the SIPs distribute consolidated market data on
recent equity and option transactions and the prevailing best quotes at
each exchange to market data subscribers. In addition, all exchanges
also make data available through direct data feeds. These feeds contain
all data included in the SIP feed, but also include depth of book
information \381\ and, depending on the exchange, may include
additional data, such as the submission, cancellation and execution of
all displayed orders and auction imbalance information on the exchange,
among other things.
---------------------------------------------------------------------------

    \379\ In other words, the exchanges and SROs sell the data
publicly and regulators can purchase it.
    \380\ ICE serves as the operator for the Consolidated Tape
Association (``CTA'') Plan SIP and the Consolidated Quote System
(``CQS'') Plan SIP. These SIPs collect and disseminate information
on quotes and trades in listed securities, other than NASDAQ listed
securities. The NASDAQ Stock Market LLC serves as the operator for
the Unlisted Trading Privileges (``UTP'') Plan SIP, which collects
and disseminates quote and trade information in NASDAQ listed
securities.
    \381\ An exchange's order book consists of all unexecuted orders
at each price. Order book data typically includes the depth
(aggregated number of shares) of the displayed orders at each price
and might include all prices in the order book or the depth at each
price over a range of prices. Displayed orders consist of any order
in which the submitter did not instruct that some or all of the
order be hidden from display.
---------------------------------------------------------------------------

    The SEC's Market Information Data Analytics System (``MIDAS'') uses
information disseminated by the SIP feeds, as well as exchange direct
feeds consisting of data that individual exchanges choose to sell to
subscribers. In addition, at the request of Commission Staff, most
equities exchanges produce and make public two datasets with
information on short sales: A file of short selling volume by stock,
which contains the short selling and total volume on that exchange by
symbol, and a file of short selling transactions, which contains trade
information such as time, volume, and price for each transaction
involving a short sale.\382\
---------------------------------------------------------------------------

    \382\ See Short Sale Reporting Study, infra note 413, for more
information on available short selling data and the demands for
additional short selling data. This study also describes information
regarding data from Form SH filings. For ten months starting during
the financial crisis, the Commission required certain institutional
investors to submit weekly reports of their short selling activity
and positions.
---------------------------------------------------------------------------

    The Commission and SROs use these publicly available trade and
order data to conduct market analyses, market reconstructions,
examinations, and investigations. Because of the accessibility and ease
of use of the public data, regulators often use it as a starting point
or a basis of comparison to other data sources. For example, real-time
surveillance can rely on SIP data, and some insider trading
surveillance relies on information from other publicly available
sources such as news sources. Further, investigations into short sale
market manipulation sometimes start with an analysis of the short
selling data. Some market analyses by regulators rely on public data
alone.\383\ However, there are limitations on these data that reduce
their usefulness to regulators. For example, they do not provide
customer information, order entry time, information about special order
handling codes, counterparties, or member identifiers. These and other
limitations are discussed in Section IV.D.2.b, infra.\384\
---------------------------------------------------------------------------

    \383\ See Collver, supra note 327.
    \384\ See also Staff of the Office of Analytics and Research,
Division of Trading and Markets, Research Note: Equity Market
Volatility on August 24, 2015 (December 2015) available at http://www.sec.gov/marketstructure/research/equity_market_volatility.pdf.
---------------------------------------------------------------------------

b. Current Limitations of Trade and Order Data
    Although regulators have access to trade and order data from the
sources described above,\385\ the available data are, for various
reasons, limited in terms of the four qualities discussed above. In
terms of completeness, current sources do not represent all of the
market activity of interest in sufficient detail in one consolidated
audit trail. In terms of accuracy, current sources may reflect data
errors, insufficiently granular clock synchronization and time stamps,
errors introduced in the process of combining data from different
sources, a lack of consistent customer and broker-dealer identifiers,
and data that is too aggregated at the record level to provide the
information regulators need. With respect to accessibility, the SROs
and Commission lack direct access to most of the data sources described
above, and with respect to timeliness, obtaining trade and order data
from current sources and converting the data into a form in which they
can be analyzed can involve a significant delay from the time of a
particular event of interest.\386\ The qualities of market data are
important to the Commission's ability to fulfill its statutory mission
in an efficient and effective manner. As a result of the limitations on
current data sources, regulators are limited in their ability to
perform the activities outlined in Section IV.D.1, above. Table 2:
Currently Available Data Sources summarizes the key characteristics of
the currently available data sources, which are discussed in more
detail below.
---------------------------------------------------------------------------

    \385\ See Section IV.D.2.a, supra.
    \386\ As discussed above and in the Adopting Release, accuracy
refers to whether the data about a particular order or trade is
correct and reliable; completeness refers to whether the data
represents all market activity of interest or just a subset, and
whether the data is sufficiently detailed to provide the required
information; accessibility refers to how the data is stored, how
practical it is to assemble, aggregate, and process the data, and
whether all appropriate regulators could acquire the data they need;
and timeliness refers to when the data is available to regulators
and how long it would take to process before it could be used for
regulatory analysis. See supra note 306.

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

[GRAPHIC] [TIFF OMITTED] TN17MY16.327

(1) Completeness
    ``Completeness'' refers to whether the data represents all market
activity of interest or just a subset, and whether the data is
sufficiently detailed to provide the required information.\391\ While
current data sources provide trade and order data specified by existing
rules and regulations, those sources do not contain all market activity
that might be required for certain market inquiries, in sufficient
detail, within one consolidated audit trail. To obtain information
regarding a particular market event, regulators may have to piece
together information from different data sources. Further, some data is
not required to be reported at all under existing regulations.\392\
Therefore, current data sources either cover only a limited number of
events and products, or lack some data fields that would be useful to
regulators, each of which impedes effective market surveillance.
---------------------------------------------------------------------------

    \391\ See supra note 306.
    \392\ See, e.g., Adopting Release, supra note 9, at 45726-30,
45741, 45750 n.286, 45756 n.361 (discussing the incompleteness of
the data recorded by existing audit trail systems such as OATS,
acknowledging that ``certain elements are not collected by existing
audit trails,'' and noting that ``existing SRO audit trails do not
require customer information to be reported''); see also Proposing
Release, supra note 9, at 32564-66, 32603 (discussing gaps in
current required audit trail information and stating that the
proposed rule would require ``national securities exchanges,
national securities associations, and their members to capture . . .
information that is not currently captured under the existing audit
trail or other regulatory requirements'').
---------------------------------------------------------------------------

A. Events and Products
    There is currently no single data source that covers all market
activities. EBS data contains executed trades but does not contain
information on orders or quotes (and thus does not provide information
on routes, modifications, or cancellations). Similarly, trade blotters
and order tickets contain only information recorded by that particular
broker-dealer or investment adviser and may contain limited information
about full order lifecycles. SRO audit trail data are limited to
identifying the activity of their members, can have incomplete
information concerning their members, lack order lifecycle information
occurring prior to receipt by an exchange, and may not contain
information regarding principal trading. Furthermore, public
consolidated and direct data feeds provide data about the entire
market, but lack information regarding non-displayed orders and do not
provide sufficient information to identify the different lifecycle
events of a single order.
    Individual SRO audit trails are extensive but still incomplete in
their coverage of the activities of the market participants they cover;
they contain only activity of their own members and many do not
necessarily contain all activity by their members. For example, FINRA's
OATS data does not include proprietary orders originated by a trading
desk in the ordinary course of a member's market making activities, or
options data. And while OATS collects data from FINRA members with
respect to orders and trades involving NMS and OTC stocks, OATS does
not include trade or order activity that occurs on exchanges or at
broker-dealers that are not FINRA members.\393\ In addition, while
broker-dealers who are not members of FINRA must be members of an
exchange SRO, an individual exchange SRO's audit trail data is
generally limited to activity taking place on that exchange.\394\
Because broker-dealers who are not members of FINRA may engage in
trading activity in off-exchange markets, a substantial portion of the
trading activity that an exchange SRO supervises is not reported to the
supervising SRO.\395\
---------------------------------------------------------------------------

    \393\ See CAT NMS Plan, supra note 3, at Appendix C, Section
B.7(b)(ii)(A). OATS includes records showing the routing of an order
to an exchange, but not the outcome of that routing. In performing
its regulatory oversight of the markets, FINRA has created an
internal process in which it augments the data it collects via OATS
with trade execution data from other exchanges with which it has
regulatory service agreements. This process provides FINRA with a
wider view of the markets than OATS previously provided, but linking
data across these sources does not yield fully accurate results. See
Section IV.D.2.b(2), infra for a discussion of the accuracy of
linking across data sources. See infra note 1060 for a discussion of
FINRA's RSAs.
    \394\ Currently, Rule 15b9-1 offers an exemption from FINRA
membership that applies if the firm is a member of a national
securities exchange, carries no customer accounts, and has annual
gross income of no more than $1,000 that is derived from securities
transactions effected otherwise than on a national securities
exchange of which it is a member (the `de minimis allowance').
Income derived from transactions for that dealer's own account with
or through another registered broker-dealer do not count toward the
$1,000 de minimis allowance. However, the national securities
exchanges have not generally supervised their members' activity
outside of the markets they operate. The Commission has proposed
modifications to Rule 15b9-1 that would require a dealer to be a
member of a registered national securities association to conduct
most off-exchange activity. See Securities Exchange Act Release No.
74581 (March 25, 2015), 80 FR 18035, 18042 (April 2, 2015)
(``Exemption for Certain Exchange Members'') (proposing to amend
rule 15b9-1 and noting that ``[n]on-Member Firms are not subject to
oversight by [FINRA] and their off-exchange transactions typically
are not overseen by the exchanges of which they may be members,''
and that ``[e]xchanges traditionally have not assumed the role of
regulating the totality of the trading of their member-broker-
dealers . . .'').
    \395\ Id. at 18043 n.85. Broker-dealers that are not FINRA
members accounted for 48% of orders sent directly to ATSs in 2014.
Therefore, OATS includes incomplete information on a substantial
portion of off-exchange trading. As of March 2015, 125 of the
approximately 4,209 registered broker-dealers were not members of
FINRA. Id. at 18052. Orders from non-FINRA members accounted for 40%
of orders sent directly to ATSs in 2013, and 32% in 2012. Id. at
18038 n.21.
---------------------------------------------------------------------------

    Further, not all FINRA members are obligated to report to OATS.
FINRA's rules exempt from reporting certain members that engage in a
non-discretionary order routing process.\396\ Additionally, FINRA has
the authority to exempt other members who meet specific criteria from
the OATS recording and reporting requirements, and has granted
approximately 50 such exemptions.\397\
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    \396\ See FINRA Rule 7410 (Definitions). The Rule specifically
excludes from the definition of ``Reporting Member'' members that
(1) engage in a non-discretionary order routing process and route
all of their orders either to a single receiving Reporting Member or
two Reporting Members, provided orders are routed to each receiving
Reporting Member on a pre-determined schedule and the time period
for the schedule does not exceed one year; (2) do not direct or
maintain control over subsequent routing or execution by the
receiving Reporting Member; and (3) have a written agreement with
the receiving Reporting Member that specifies the respective
functions and responsibilities of each party to effect full
compliance with the OATS recording and reporting rules. Finally, the
receiving Reporting Member must record and report all required
information pertaining to the order.
    \397\ See FINRA Rule 7470 (Exemption to the Order Recording and
Data Transmission Requirements). The Rule provides that, for good
cause shown, FINRA may exempt a member from its recording and
reporting requirements if: (1) The member and current control
affiliates and associated persons of the member have not been
subject within the last five years to any final disciplinary action,
and within the last ten years to any disciplinary action involving
fraud; (2) the member has annual revenues of less than $2 million;
(3) the member does not conduct any market making activities in NMS
stock or OTC securities; (4) the member does not execute principal
transactions with its customers; and (5) the member does not conduct
clearing or carrying activities for other firms. This authority
sunsets on July 10, 2019. Approximately 799 firms that are excluded
or exempt from OATS would incur CAT reporting obligations if the
Plan were approved; see also infra note 931, Section IV.F.1.c(2)B.i,
infra.
---------------------------------------------------------------------------

    Exchange audit trails also lack information on the order lifecycle
events that occur prior to receipt at the exchange.\398\ SRO audit
trail data available from the Intermarket Surveillance Group (``ISG'')
\399\ does not

capture quotes/orders away from a market's inside market (i.e., those
quotes/orders below the best bid or above the best offer); currently
identify market participants in a trade only to the clearing broker
level; do not provide information on the executing broker; and contain
certain data fields that are not mandatory.\400\
---------------------------------------------------------------------------

    \398\ The Commission understands that exchange routing broker-
dealers, which route orders from exchanges to other Execution
Venues, do substantial business, but it is very hard in current data
sources to track orders sent to one exchange that are then sent to
another exchange or off-exchange venue by the exchange routing
broker-dealer.
    \399\ The ISG was established in the early 1980s and is
comprised of over 50 international exchanges, market centers, and
market regulators that perform market surveillance in their
respective jurisdictions. The purpose of the ISG is to provide a
framework for the sharing of information and the coordination of
regulatory efforts among exchanges trading securities, options on
securities, security futures products, and futures and options on
broad-based security indexes, to address potential inter-market
manipulations and trading abuses. In effect, the ISG is an
information-sharing cooperative governed by a written agreement. ISG
also provides a forum for ISG members to discuss common regulatory
concerns, thus enhancing members' ability to efficiently fulfill
their regulatory responsibilities. As a condition to membership,
every ISG member must represent that it has the ability to obtain
and freely share regulatory information and documents with other ISG
members, generally unencumbered by rules, nationally imposed
blocking statutes or bank secrecy laws. Regulatory information is
only shared on an as-needed basis and only upon request, and any
information shared through ISG must be kept strictly confidential
and used only for regulatory purposes. The SEC is not a member of
ISG, nor is ISG subject to regulatory oversight by the SEC.
    \400\ See Comment Letter from FINRA and NYSE Euronext regarding
Proposing Release (August 9, 2010), available at https://www.sec.gov/comments/s7-11-10/s71110-46.pdf.
---------------------------------------------------------------------------

    Additionally, some SRO audit trails do not include and are not
required to include activity associated with principal trading, such as
market-making activity. This may result in the exclusion of a
significant amount of activity, particularly for firms with substantial
market-making business activities. Principal trading activity
represents a significant portion of market activity and there are
aspects of the current market regime that may result in the
underreporting of this trading activity. Indeed, an analysis by
Commission Staff estimates that principal trading accounted for 40.5%
of all reported transactions and principal activity accounted for 67%
of all exchange message traffic.\401\ And, because these figures do not
capture principal activity done by trading on-exchange through other
broker-dealers, these estimates are likely to be biased downwards.\402\
---------------------------------------------------------------------------

    \401\ The analysis used audit trail data (where orders are
identified at the broker-dealer level), from 10 exchanges, excluding
CHX, and OATS reported off-exchange activity. Message traffic was
defined as order placement, cancellation, or amendment.
    \402\ The fact that off-exchange principal trading of non-FINRA
member broker-dealers is not fully reported in OATS, may also bias
these estimates downwards.
---------------------------------------------------------------------------

    Finally, no single current data source integrates both equities and
options. The lack of any combined equity and options audit trail data
is a significant impediment to regulators performing cross-product
surveillance.\403\
---------------------------------------------------------------------------

    \403\ Likewise no single audit trail combines futures with NMS
Securities either. See Adopting Release, supra note 9, at 45744 for
a discussion of the potential inclusion of futures in CAT Data.
---------------------------------------------------------------------------

B. Data Fields
    Each of the available data sources discussed above \404\ is missing
certain data fields that are useful for conducting a variety of
regulatory activities. Furthermore, certain valuable data fields are
not contained in any of the data sources discussed above. For example,
the lack of completeness in the data sources makes it impossible to use
certain key information, such as customer identifiers and allocation
information, in market surveillance. Further, even for single-security
events within a single trading venue, regulators may need to seek data
from multiple sources such as an SRO audit trail and EBS.\405\
---------------------------------------------------------------------------

    \404\ See Section IV.D.2.a, supra.
    \405\ See Section IV.D.2.a, supra, and Section IV.D.2.b(3)
infra, for a discussion of how regulators access such data.
---------------------------------------------------------------------------

    Most notably, the identity of the customer is unavailable from all
current data sources that are reported to regulators on a routine
basis. A unique customer identifier could be useful for many types of
investigations and examinations such as market manipulation
investigations and examinations of investment advisers. As noted above,
some data sources--specifically Large Trader, EBS, trade blotters, and
order tickets--identify customers.\406\ But these data sources are not
reported on a routine basis, provide only one part of the order
lifecycle, and have other inherent limitations.
---------------------------------------------------------------------------

    \406\ Trade confirmation data also identifies customers, but
trade confirmation data are much more basic than a trade blotter.
See supra note 375.
---------------------------------------------------------------------------

    Because there is currently no data source that includes customer
identities across multiple parts an order lifecycle,\407\ regulators
must engage in a process of linking EBS, trade blotters and order
tickets with SRO audit trails, which can be a burdensome and imperfect
process.\408\ For example, trade blotter and order ticket data that
identifies customers from one broker-dealer may only include customer
names and thus may not be readily matched to similar data from another
broker-dealer, or may require substantial effort and uncertainty to
reconcile across firms. Further, EBS data's limited coverage of trading
activity and lack of some detailed trade information creates
inefficiencies in insider trading investigations. These investigations
often begin with a request for EBS data of trades before a significant
corporate news event that affected a company's stock price. After
identifying accounts that made suspicious trades, investigators often
request additional EBS data of all trades by the accounts during the
same period. If the additional data reveal suspicious trades by the
accounts of the securities of other companies, investigators often must
make a third round of EBS requests for data of trades by all accounts
in those securities. If trading is done in an omnibus account,
Commission Staff must ask firms to provide the identity of the account
holder, and then request account information. To investigate for
manipulation (e.g., marking the close, order layering, spoofing,\409\
wash sales, trading ahead), Commission Staff may also link data from
multiple sources. First, Commission Staff obtains equity and option
cleared reports from an internal online system that interfaces with
data provided by the DTCC. Because the equity and option cleared
reports do not have trade details, Commission Staff may also request
trade information through EBS submissions from one or multiple firms.
If a trade was executed on behalf of another firm, Commission Staff may
then contact the other firm, until Staff can find out who placed the
trade and the account holder. The Commission may then obtain granular
trade information that contains order entry time and order execution
time from firms or brokers via request or subpoena.\410\
---------------------------------------------------------------------------

    \407\ The Commission approved a FINRA rule that would require
broker-dealers to report to OATS the identity of U.S. registered
broker-dealers that are not FINRA members and broker-dealers that
are not registered in the U.S. but have received an SRO-assigned
identifier in order to access certain FINRA trade reporting
facilities, from whom they receive or route an order. See Securities
Exchange Act Release No. 77523 (April 5, 2016), 81 FR 21427 (April
11, 2016) (Order Approving FINRA Rule to Report Identity of Certain
Broker-Dealers to OATS). CAT would similarly capture this
information upon full implementation.
    \408\ For further discussion of the problems associated with
linking, see Section IV.D.2.b(2)C, infra.
    \409\ See supra note 343.
    \410\ The process to obtain detailed trade information from
firms and brokers via requests or subpoenas generally takes anywhere
from two to four weeks depending on the size of the request.
---------------------------------------------------------------------------

    The methods for obtaining such information significantly reduce its
utility, particularly for surveillance and market reconstruction
purposes. Market reconstructions, for example, cannot take advantage of
the detail in the EBS and trade blotter data because of the resources
required to link so many data sources, lack of necessary elements (such
as time stamps in milliseconds) needed to link data sources (for
example, matching large trader reports to activity on a particular
exchange), or the absence of standardized format. To examine a tip or
complaint, regulators may consolidate data from each affected

market participant to determine the identities of those responsible for
the atypical activity in question. To the extent that the activity
originates from several market participants, regulators must request
data from each of those market participants, and possibly other market
participants, to obtain information that could identify the customer(s)
originating the orders that created the atypical activity.
    For many regulatory activities, lack of completeness results in
regulators initially relying upon the most accessible data sources,
with significant information contained only in data sources made
available by request. Starting regulatory functions with incomplete
data sources requires regulators to later make data requests and link
such data request responses. More importantly, however, incomplete or
unconsolidated data interferes with effective surveillance. Access to
data through non-routine means makes investigations and examinations
less efficient, and makes automated surveillance less accurate and less
effective. For example, the publicly available data discussed above
\411\ identify exchanges but lack most of the fields found in some SRO
audit trails or EBS, such as customer information, order entry time,
order execution time, information about special order handling codes,
counterparties, and member identifiers. Similarly, equity cleared
reports contain only the date, the clearing firm, and the volume
cleared by each clearing firm and not the trade size, trade time, or
trade location. Option cleared reports contain only the date, the
clearing firm, number of customer contracts, and number of firm
contracts for the options.
---------------------------------------------------------------------------

    \411\ See Section IV.D.2.a(6), supra.
---------------------------------------------------------------------------

    Some valuable data fields, such as modifications that make an order
non-displayed and other special handling instructions are consistently
available on only a few data sources or require linking different data
sources.\412\ The lack of direct, consistent access to order display
information and special handling instructions creates inefficiencies in
surveillances, examinations, and investigations that examine hidden
liquidity and the treatment of customer orders. Data that are not
directly accessible by regulators at all include buy-to-cover
information and subaccount allocation information, including the
allocation time. For example, no current data source allows regulators
to directly identify when someone is buying to cover a short sale.
Regulators could use this information to better understand short
selling and for investigations of short sale manipulation. Indeed, the
absence of this information during the financial crisis in 2008 reduced
the efficiency of the reconstruction of investor positions in financial
companies.\413\
---------------------------------------------------------------------------

    \412\ Order display information (i.e., whether the size of the
order is displayed or non-displayed) is indicated in the ``Customer
Instruction Flag'' and special handling instructions are indicated
in the ``Special Handling Code'' of an OATS report. The Customer
Instruction Flag is mandatory if a limit or stop price is provided.
A Special Handling Code is required for order modifications, reserve
size orders, when the order is routed electronically to another
member, or when the terms and conditions of the order were derived
from a related options transaction. See FINRA, OATS Reporting
Technical Specifications, at Appendix A (June 26, 2015), available
at http://www.finra.org/sites/default/files/TechSpec_20150825.pdf.
This data is not directly available to all regulators. The
Commission must request this data from FINRA.
    \413\ Having access to buy-to-cover information was also one of
the subjects of a Dodd-Frank-mandated study on short sale reporting.
See SEC, Short Sale Position and Transaction Reporting (June 5,
2014) (``Short Sale Reporting Study''), available at http://www.sec.gov/dera/reportspubs/special-studies/short-sale-position-and-transaction-reporting.pdf.
---------------------------------------------------------------------------

    Subaccount allocation information needed for regulatory activities
can be difficult for regulators to collect and compile. SRO audit
trails currently do not require allocation reports and broker-dealers
may not have records of the time of a subaccount allocation. When
regulators require an understanding of subaccount allocations for a
regulatory task, they generally request and sift through trade blotter
or EBS data in an attempt to identify allocations and the details of
those allocations. Current trade blotter data contains limited customer
information on allocations and is not required to contain allocation
time information at the subaccount level. While the Commission is
sometimes able to acquire allocation time on trade blotters, not all
broker-dealers keep records in a manner that facilitates efficient
regulatory requests for allocation time information.
    The difficulty in obtaining allocation information and the
difficulty in reconstructing allocations with data from broker-dealers
limits the efficiency of certain surveillances and examinations.
Allocation time at the subaccount level is critical for determining
whether some customers are systematically given more favorable
allocation treatment than others. For example, when a broker-dealer
places an order or series of orders for multiple customer accounts that
generates multiple executions at multiple prices, it is possible that
different customers receive different prices in the allocation process.
However, if some customers systematically receive less favorable prices
than others when they should be receiving the same prices for their
executions, this could indicate that the broker-dealer is handling
allocations improperly.\414\
---------------------------------------------------------------------------

    \414\ If a group of orders are bundled together for execution,
when those same orders are allocated, they should receive the same
(usually average price) allocations. However, if executions are for
orders that are not bundled together, it might be appropriate that
customers for those separate orders would receive differently-priced
allocations.
---------------------------------------------------------------------------

(2) Accuracy
    In the Adopting Release, the Commission noted that while ``to some
extent, errors in reporting audit trail data to the central repository
will occur,'' the CAT NMS Plan would improve the quality of data
including improvements to accuracy.\415\ Therefore, the economic
analysis carefully considers the Baseline of the accuracy of data
regulators currently use in order to consider whether and to what
degree the CAT NMS Plan would provide more accurate data.
---------------------------------------------------------------------------

    \415\ See Adopting Release, supra note 9, at 45730.
---------------------------------------------------------------------------

    The prospect of inaccurate data can result in regulators expending
extra resources to run additional quality checks to ensure reliable
data and conclusions in enforcement investigations, or being unable to
draw reliable conclusions at all. In addition, risk-based analysis may
not properly identify a potential risk that justifies further
examination if the underlying data suffers from inaccuracies.
Ultimately, inaccurate data results in less efficient investigations as
well as less effective surveillance and risk analyses. This economic
analysis considers several forms of data inaccuracy, including data
errors, inaccurate event sequencing, the inability to link data
accurately, inconsistent identifiers, and obfuscating levels of
irreversible data aggregation.
A. Data Errors \416\
    Based on Staff experience, the Commission preliminarily believes
that data errors affect most current data and can persist even after
corrections. For

example, Commission Staff has investigated instances where information
was inaccurately reported by broker-dealers, most notably in EBS data
given to the Commission.\417\ In addition, the Commission believes that
data sources that depend on data translated from back-office systems
can be less accurate than those that come from trading systems, such as
trade blotters and data sourced from exchanges' electronic trading
systems, because the data translation process creates an additional
source of potential errors in code that may not work as intended. Data
from trading systems can also contain errors resulting from a coding
error in the query pulling the data. Such coding errors can affect any
data including trade blotters. For example, trade blotters are stored
using the ticker symbol in effect at the time of the trade. If the
ticker symbol changes between the trade and the data request, the
coding may fail to take the ticker symbol change into account and fail
to retrieve the correct data. The Commission has found that trade
blotter data can often be inaccurate due to improper inclusion of
cancelled orders or corrections, making accurate reconciliation
difficult. Furthermore, trade blotter data can lack security
information including CUSIP, symbol, or description at the subaccount
level, which are important features for helping regulators determine
potential violations.\418\
---------------------------------------------------------------------------

    \416\ As used herein, the term ``data errors'' refers to
instances where data reflect false information or are missing
information such that they do not reflect order events that occurred
in the market fully and accurately. Under this definition of ``data
errors,'' a trading error or an order entry error would not be a
``data error.'' For example, if a trader submitted an order to an
exchange with an order size of 100,000, an accurate order record
would contain an order size of 100,000. If the trader actually
intended to enter the order size as 1,000, the accurate order record
would still be 100,000 because that would reflect the actual state
of the market at the time. In other words, the 100,000 order size is
not a ``data error.'' If the trader later corrected the order size,
accurate data would reflect the subsequent corrections while still
preserving the accurate state of the market at the time.
    \417\ For example, Commission staff have experienced frequent
errors in EBS data such as omitted variables, decimals in the wrong
places, blank account information, and data for the wrong
securities. The Commission has instituted actions against entities
in connection with inaccurate EBS data. See, e.g., Securities
Exchange Act Release No. 75445 (July 14, 2015), In the Matter of OZ
Management, LP, Administrative Proceeding File No. 3-16686 (OZ
Management, LP admitted submitting inaccurate data to four of its
prime brokers); see also Section IV.D.2.b(4), infra, for a
discussion of one impact of inaccurate data.
    \418\ In cases where Commission staff has used these data, it
has found that the frequent omission of these important fields in
trade blotter data is generally due to the manner in which the data
is queried by broker-dealers. There are a variety of reasons why
these fields may be excluded from a query. For example, over time
firms make changes to their software systems; records stored by
previous versions, particularly when the records are archived in a
secondary location, may not be fully compatible with software that
is written to access more current versions of this data.
Additionally, sometimes when a broker-dealer or clearing firm merges
or is acquired, its trade data may be compromised due to
incompatible systems or inadequate data storage issues. This problem
was particularly relevant following the financial crisis.
Consequently, staff does not currently believe that this missing
information is caused by a failure of broker-dealers to collect and
retain these variables, but rather that over time this data becomes
less accessible by software tools and may require hand processing by
broker-dealers providing this information.
---------------------------------------------------------------------------

    Audit trail data contain errors, as well. The CAT NMS Plan reports
that 2.42% of order events submitted to OATS fail validation
checks,\419\ resulting in the rejection of almost 425,000 reports per
day, on average.\420\ While FINRA sends these records back to its
members to correct, not all data errors are identified because OATS
limits error correction requests to records with internal
inconsistencies within a given member's submission. In particular,
significant error rates in event linking are common because there is no
cross-participant error resolution process; FINRA estimates that 0.5%
of OATS routing reports directed to another FINRA member broker-dealer
cannot currently be linked.\421\ The CAT NMS Plan reports that,
following the rollouts of three major updates to OATS, 0.86% of Trade
Reporting Facility (``TRF'') reported trades could not be matched to
OATS execution reports, 3.12% of OATS route reports could not be
matched to exchange orders, and 2.44% of inter-firm routes could not be
matched to a record of the receiving firm's receipt of a routed
order.\422\
---------------------------------------------------------------------------

    \419\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(b). When FINRA receives an end-of-day OATS file from a member,
it performs over 152 validation checks on each order event reported
to OATS. Each of these checks can result in rejecting an OATS data
submission and generating an error message. In addition to
validation checks, FINRA determines whether a file that is
syntactically correct nevertheless contains errors in content
related to internally inconsistent information about processing,
linking, and routing orders. For some errors, FINRA requires the
member to provide corrections within five business days after
rejections are available. See OATS Reporting Technical
Specifications, supra note 357, at 6-1--6-10. Duplicate records and
records with symbols that are not reportable to OATS may result in
rejections that do not require repair. Id. at 6-4. Validation checks
refer to tests of whether data is consistent with a set of rules
that specify conditions that should be met by valid data. Validation
checks are typically limited to detecting errors that can be
discovered by a concise set of logical rules using data within scope
at the time the validation test is run. An incorrect price that is
negative would likely be detected by a validation check, while a
price that was a few cents too low may not. Validation checks that
apply across multiple records may be difficult to apply across data
that is submitted at different times.
    \420\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(b); see also Adopting Release, supra note 9 at 45729.
    \421\ See Section IV.D.2.b(2)C, infra.
    \422\ See CAT NMS Plan, supra note 3, at Appendix C, Section
A.3(b).
---------------------------------------------------------------------------

    Other audit trail data may also contain errors. For example, the
Commission notes that exchange SROs populate most of the information
with data from their in-house order and trading records, but a few of
these exchange SROs also rely on members to complete their audit
trails.
B. Event Sequencing
    The ability to sequence market events is crucial to the efficacy of
detecting and investigating some types of manipulation, particularly
those involving high frequency trading, those in liquid stocks in which
many order events can occur within microseconds, and those involving
orders spread across various markets. In today's market, high frequency
and algorithmic traders can react to changes in the market in a few
milliseconds or less.\423\ Investigations involving algorithmic
trading, therefore, can require the ability to sequence the order and
trade events to within a few milliseconds; however, regulators relying
on currently available data may have difficulty sequencing events that
occur within a second on different trading venues or broker-dealer
systems.\424\ In addition, in one type of trade-based manipulation, a
manipulator might build a short position in a stock, submit sell orders
designed to decrease the stock price, and finally buy at an
artificially low price. To analyze this activity, except when cover
orders precede the sell activity, it would be necessary to determine
whether the orders intending to create an artificial price came before
the orders intending to profit from the artificial price, which becomes
difficult when the systems on which order events occurring close in
time to each other have clocks that are not synchronized. Further,
insufficiently granular time stamps can make sequencing events across
venues impossible.
---------------------------------------------------------------------------

    \423\ See, e.g., Joel Hasbrouck and Gideon Saar, Low-Latency
Trading, 16 Journal of Financial Markets 646 (2013) in which the
authors report apparent HFT response times to market events of 2-3
milliseconds. Given technology advances, it is likely that response
times have decreased since their sample period, which ends in June
2008.
    \424\ Regulators can sequence events occurring on the same venue
or on the same systems at broker-dealers, but sequencing across
venues or broker-dealer systems that could have clocks that are not
synchronized with each other is more difficult.
---------------------------------------------------------------------------

    Thus, the sequencing of order events requires both sufficient clock
synchronization across market participants and time stamps that are
granular enough for accurate sequencing.\425\ As discussed below,

current clock synchronization standards make this process difficult.
---------------------------------------------------------------------------

    \425\ For example, if two market participants report that two
non-simultaneous events happened at 10:15:45, then the time stamps
are not granular enough to sequence the events and regulators would
need sub-second time stamp granularity to distinguish them. If the
two market participants each have up to one-second clock drift from
the actual time, the 10:15:45 time stamps only show that the event
happened between 10:15:44 and 10:15:46. Only when regulators have
both adequate time stamp granularity and sufficient clock offset
tolerances can events be sequenced using time stamps.
---------------------------------------------------------------------------

i. Clock Synchronization
    Clock synchronization refers to the synchronization of the business
clocks used by market participants for the purposes of recording the
date and time of market events to a centralized benchmark clock, often
that maintained by the NIST. Clock synchronization helps to ensure that
the time stamps used by various participants are consistent, thereby
allowing regulators to compare time stamps across participants and to
use multiple time stamps to determine the sequence of market events.
The ability of regulators to accurately sequence events can be limited
by the permitted ``offset'' between the clocks--i.e., the length of the
gap that is permitted between a participant's clock and the time
maintained by a centralized benchmark clock.\426\ For example, if the
offset between the clocks is one second, regulators cannot accurately
determine the correct sequence of events in the market occurring within
a two-second period, because each clock may be up to one second fast or
slow.
---------------------------------------------------------------------------

    \426\ For example, if a participant's clock records a point in
time as 11:00:00 and the NIST clock records the same point in time
as 11:00:01, then the offset between the clocks is one second.
---------------------------------------------------------------------------

    Current rules require most broker-dealers to synchronize their
system clocks to within one second. In particular, FINRA specifies a
clock offset tolerance of one second,\427\ and the NASDAQ Stock Market
and NASDAQ OMX BX require members to comply with FINRA clock
synchronization rules.\428\ CHX specifies a clock offset tolerance of
500 milliseconds.\429\ NYSE MKT and NASDAQ OMX PSX require members to
synchronize their clocks relative to a time source designated by the
Exchange, but do not specify the standard.\430\ NYSE Arca allows
options traders to use any time provider source for clock
synchronization as long as the business clocks it uses on the Exchange
are accurate to within three seconds of the NIST clock or the United
States Naval Observatory Master Clock in Washington DC.\431\
---------------------------------------------------------------------------

    \427\ See FINRA Rule 7430 (requiring each member to
``synchronize its business clocks that are used for purposes of
recording the date and time of any event that must be recorded
pursuant to the FINRA By-Laws or other FINRA rules, with reference
to a time source as designated by FINRA, and shall maintain the
synchronization of such business clocks in conformity with such
procedures as are prescribed by FINRA.''). Section 2 of the OATS
Technical Specifications states that all computer system clocks and
mechanical time stamping devices must be synchronized to within one
second of the NIST clock and must be synchronized every day. See
OATS Reporting Technical Specifications, supra note 357, at 2-1. In
November 2014, FINRA issued a Regulatory Notice seeking comment on a
proposal to change the clock offset tolerance to be 50 milliseconds.
This proposal also proposed to move the clock offset tolerance from
the OATS Technical Specifications to FINRA's books and records rules
so that the requirements apply to the recording of the date and time
of any event that FINRA By-Laws or Rules require, not just OATS
requirements. See FINRA, Equity Trading Initiatives: Synchronization
of Business Clocks, Regulatory Notice 14-47, available at http://www.finra.org/sites/default/files/notice_doc_file_ref/Notice_Regulatory_14-47.pdf. On February 9, 2016, FINRA filed a
proposed rule change with the Commission. The proposal would reduce
the clock offset tolerance for members' computer clocks that are
used to record events in NMS securities, including standardized
options, and OTC Equity Securities, from within one second of the
NIST atomic clock to within a 50-millisecond tolerance of the NIST
atomic clock. FINRA would require firms with systems that capture
time in milliseconds to comply with the new 50-millisecond clock
offset tolerance within six months of the effective date; remaining
firms that do not have systems which capture time in milliseconds
would have 18 months from the effective date to comply with the 50-
millisecond standard. The proposal would not change the current one-
second clock offset tolerance of the NIST clock requirement for
mechanical clocks or time stamping devices. The proposal would
consolidate and codify the clock synchronization requirements in new
FINRA Rule 4590. The Commission has published notice of this
proposed rule change. See Securities Exchange Act Release No. 77196
(February 19, 2016), 81 FR 9550 (February 25, 2016).
    \428\ See NASDAQ Rule 7430A (``(a) Nasdaq members shall comply
with FINRA Rule 7430 as if such Rule were part of Nasdaq's rules.
(b) For purposes of this Rule, references to `the FINRA By-Laws or
other FINRA rules' shall be construed as references to `the Nasdaq
Rules'); NASDAQ OMX BX Rule 6953 (``(a) Exchange members shall
comply with NASD Rule 6953 [superceded by FINRA Rule 7430] as if
such Rule were part of the Exchange's rules. FINRA is in the process
of consolidating certain NASD rules into a new FINRA rulebook. If
the provisions of NASD Rule 6953 are transferred into the FINRA
rulebook, then Equity Rule 6953 shall be construed to require
Exchange members to comply with the FINRA rule corresponding to NASD
Rule 6953 (regardless of whether such rule is renumbered or amended)
as if such rule were part of the Rules of the Exchange. (b) For
purposes of this Rule, references to `the By-Laws or other rules of
the Association' shall be construed as references to `the Rules of
the Exchange.' '').
    \429\ See CHX Rule 3, Interpretations and Policies .03 (``These
rules shall not apply to orders sent or received through the
Exchange's matching system or through any other electronic systems
that the Exchange expressly recognizes as providing the required
information in a format acceptable to the Exchange. The Exchange
will not recognize a non-Exchange system as providing information in
an acceptable format unless that system has synchronized its
business clocks for recording data with reference to a time source
designated by the Exchange and maintains that synchronization in
conformity with procedures prescribed by the Exchange.''); Rule 4,
Interpretations and Policies .02 (``Each Participant or layoff
service provider shall synchronize its business clocks that are used
for purposes of recording the date and time of any event that must
be recorded pursuant to this provision with reference to a time
source as designated by the Exchange, and shall maintain the
synchronization of such business clocks in conformity with such
procedures as are prescribed by the Exchange.''); Rule 5,
Interpretations and Policies .01(a) (``Clock synchronization and
timing of the determination of improper trade-throughs. The
Exchange's systems shall routinely, throughout the trading day, use
processes that capture the time reflected on the atomic clock
operated by the National Institute of Standards and Technology and
shall automatically make adjustments to the time recorded in the
Exchange's Matching System to ensure that the period between the two
times will not exceed 500 milliseconds. The Exchange shall determine
whether a trade would create an improper trade-through based on the
most recent NBBO that has been received and processed by the
Exchange's systems.'').
    \430\ See NYSE Rule 123, Supplementary Material .23 (``Any
vendor or proprietary system used by a member or member organization
on the Floor to record the details of an order or report for
purposes of this rule must be synchronized with reference to a time
source as designated by the Exchange.''); NYSE MKT Rule 7430 (``Each
member organization shall synchronize its business clocks that are
used for purposes of recording the date and time of any event that
must be recorded pursuant to the Rules of the Exchange, with
reference to a time source as designated by the Exchange, and shall
maintain the synchronization of such business clocks in conformity
with such procedures as are prescribed by the Exchange.''); NASDAQ
OMX PSX Rule 3403 (``Each member organization shall synchronize its
business clocks that are used for purposes of recording the date and
time of any event that must be recorded pursuant to the rules of the
Exchange, with reference to a time source as designated by the
Exchange, and shall maintain the synchronization of such business
clocks in conformity with such procedures as are prescribed by the
Exchange.'').
    \431\ See NYSE Arca Options Rule 6.20 (``(a) Each OTP Holder and
OTP Firm must synchronize, within a time frame established by the
Exchange, the business clocks that it uses for the purpose of
recording the date and time of any event that must be recorded
pursuant to the Rules of the Exchange. OTP Holders and OTP Firms may
use any time provider source. Each OTP Holder and OTP Firm must,
however, ensure that the business clocks it uses on the Exchange are
accurate to within a three-second [sic] of the National Institute of
Standards and Technology Atomic Clock in Boulder Colorado (`NIST
Clock') or the United States Naval Observatory Master Clock in
Washington DC (`USNO Master Clock'). This tolerance includes all of
the following: (1) The difference between the NIST/USNO standard and
a time provider's clock; (2) transmission delay from the source; and
(3) the amount of drift of the OTP Holder or OTP Firm's business
clock. For purposes of this Rule, `business clocks' mean an OTP
Holder or OTP Firm's proprietary system clocks. OTP Holders and OTP
Firms must set forth in their written supervisory procedures,
required by Rule 11.18, the manner in which synchronization of
business clocks will be conducted, documented and maintained.'').
---------------------------------------------------------------------------

    In practice, some broker-dealers currently synchronize their clocks
to smaller clock offset tolerances. FIF surveyed market participants to
gather information on current broker-dealer clock synchronization
practices.\432\ The

survey found that 29% of respondents currently synchronize their clocks
to permit a maximum clock offset of one second from NIST time.\433\ The
survey further found that 10% of market participants permit a maximum
offset from NIST time that is between 50 milliseconds and one second,
21% of respondents permit a 50-millisecond maximum offset, and 18% of
respondents permit a maximum offset that is less than 50 milliseconds.
The remaining 22% of survey respondents utilize multiple clock offset
tolerances across their systems, ranging from five microseconds to one
second. FIF noted that 69% of firms that achieve a maximum clock offset
of 50 milliseconds or less are large firms reporting more than three
million OATS records per month.
---------------------------------------------------------------------------

    \432\ See FIF Clock Offset Survey, supra note 127. The
Commission notes limitations to the survey that could result in
downward bias and imprecision. Specifically, the broker-dealers
represented by the survey are primarily complex and large broker-
dealers in terms of market activity levels; consequently, smaller
broker-dealers are underrepresented. But, as discussed below, the
exclusion of small broker-dealers is unlikely to materially affect
industry costs because smaller broker-dealers are unlikely to incur
significant clock-synchronization costs because the majority of
broker-dealers rely on service bureau clocks to time stamp their CAT
Reportable Events.
    \433\ Id.
---------------------------------------------------------------------------

    Certain exchanges, the SIPs, and FINRA synchronize their clocks for
their trading, recordkeeping, and other systems. According to FIF, all
exchange matching engines meet a clock offset tolerance of 50
milliseconds.\434\ However, NASDAQ recently stated that all exchanges
trading NASDAQ securities synchronize their matching engines and
quotation systems to within 100 microseconds.\435\ The Commission
understands that the NYSE, the options exchanges, and the SIAC SIP have
comparable clock synchronization standards. In conversations with
Commission Staff, the Participants stated that absolute clock offset on
exchanges averages 36 microseconds.\436\
---------------------------------------------------------------------------

    \434\ Id.
    \435\ See NASDAQ, UTP Vendor Alert #2015-7 (April 24, 2015),
available at https://www.nasdaqtrader.com/TraderNews.aspx?id=UTP2015-07 (describing additional time stamps to
be reported to the SIP, including information on exchange clock
synchronization, and stating that ``[e]xchanges use a clock sync
methodology ensuring that timestamps are accurate within tolerances
of 100 microseconds or less.'').
    \436\ In response to questions from Commission Staff, the
Participants surveyed the exchanges to establish their current
average clock offset. All exchanges that currently operate matching
engines responded to the survey, which measured the offset from the
exchange clock to NIST. The Participants noted that the frequency
with which exchanges measure their clock offset ranges from once per
second to once per fifteen minutes, and the procedures to correct
for clock offset vary. Some exchanges correct by slewing, in which
the offset is gradually corrected, while others use stepping, in
which the offset is immediately corrected. The process by which
clock offset is corrected can impact the ability to order events
time stamped by a single clock because stepping could result in a
backwards adjustment in recorded time.
---------------------------------------------------------------------------

    Because multiple order events can occur within timeframes of less
than one second, current clock synchronization requirements and
practices greatly limit the ability of regulators to accurately
sequence order events. To examine, among other things, how many events
can be synchronized with current clock offset tolerances, Commission
Staff conducted an analysis of the frequency of events using MIDAS
data.\437\ In the analysis, events are all real-time messages,
consisting of trades, orders, modifications, cancellations and updates
from exchange direct feeds and trades from the FINRA TRFs. The analysis
focused on identifying whether, for each order event, an event at
another venue occurred within a given time range.\438\ For the purposes
of the analysis, events at another venue were called an ``unrelated
event.'' The Commission recognized that order events occurring on the
same venue have sequence numbers that allow sequencing even if orders
have the same time stamp. Therefore, the analysis considered only
whether any unrelated orders existed within a given time range that
could complicate the sequencing across the market.\439\
---------------------------------------------------------------------------

    \437\ The MIDAS system does not contain all of the events in a
given security that would be in CAT. Therefore, the analysis is
limited, but still provides useful insights.
    \438\ The methodology to calculate these percentages starts with
sorting all event messages for every day chronologically by exchange
time stamp. (MIDAS does not report the exchange time stamp; but it
provides the difference between the MIDAS time stamp and the
exchange or TRF time stamp; the analysis uses this value to derive
the exchange time stamp.) For each event, it calculates the
difference (Delta) between the current time stamp (t0)
and the last time stamp (t-1) in the same security on a
different venue.
    Deltanearest last = t0,venue A -
maximum(t-1,venue B, t-1,venue C,
t-1,venue D, t-1,venue E)
    This is the shortest time difference
(Deltanearest last) between an event on venue A and a
preceding event on any venue, except for venue A. Next, the analysis
calculates the time difference (Deltanearest next)
between the current time stamp (t0) and the next time
stamp (t1) in the same security on a different venue.
    Deltanearest next = minimum(t1,venue B,
t1,venue C, t1,venue D, t1,venue E)
- t0,venue A
    Finally, the analysis uses the shorter of the time differences
to evaluate whether an event occurs within a particular time period
of another event in the same security on a different venue.
    Deltanearest = minimum(Deltanearest last,
Deltanearest next)
    Values are aggregated over one week (June 15, 2015 through June
19, 2015) for the equities analysis; and the options analysis data
is from one day (June 15, 2015).
    \439\ Within the analysis, events reported to the TRF are
treated as occurring on a different trading venue than other recent
events because TRF data comprises many separate venues (such as ATSs
and off-exchange market makers). While events within a single
exchange with identical time stamps can potentially be sequenced
through record identifiers recorded by the exchange, for TRF trades
this is often untrue because many venues with independent clocks
contribute to the aggregate TRF data.

         Table 3--Percentage of Events Close to Unrelated Events
------------------------------------------------------------------------
                                                    Percent of unrelated
                                                           events
        Nearest event time  stamped within         ---------------------
                                                     Equities   Options
------------------------------------------------------------------------
2 seconds.........................................      98.69      93.03
1 second..........................................      97.95      90.99
100 milliseconds..................................      92.16      81.17
50 milliseconds...................................      89.12      76.59
10 milliseconds...................................      83.49      64.46
5 milliseconds....................................      81.28      58.26
2 milliseconds....................................      77.92      49.30
1 millisecond.....................................      74.31      41.13
200 microseconds..................................      57.53      21.58
100 microseconds..................................      48.09      14.51
10 microseconds...................................      21.42       3.13
5 microseconds....................................      14.44       3.12
------------------------------------------------------------------------

    Table 3 shows that 97.95% of the order events for listed equities
and 91% of order events for listed options in the samples occurred
within one second of another unrelated order event in the same
security. At the other extreme in Table 3, 14.44% of the unrelated
order events for listed equities and 3.12% of the unrelated order
events for listed options in the same security occurred within 5
microseconds of another order event in the same security. The
Commission notes that Table 3 underestimates the true frequency of
unrelated events within the given time frames because it includes only
order events that are included in the MIDAS data. As such, the analysis
is unable to include events such as the placing of hidden orders on
exchanges, the placing of orders on an ATS, order originations, order
routes, order receipts, and order cancellations and modifications for
any order not displayed on an exchange order book. Despite this
limitation, Table 3 illustrates how the current frequency of order
events makes sequencing unrelated order events difficult.
ii. Time Stamps
    Given the frequency with which order events can occur, regulators
need sufficiently granular time stamps to sequence events across orders
and within order lifecycles. As noted above, even if the clocks
recording time stamps have no clock offset, the granularity of the time
stamp can limit regulators' ability to sequence events accurately.\440\
---------------------------------------------------------------------------

    \440\ In addition, Craig W. Holden and Stacey Jacobsen,
Liquidity Measurement Problems in Fast, Competitive Markets:
Expensive and Cheap Solutions, 69 Journal of Finance 1747 (2014),
shows that using time stamps in seconds instead of milliseconds can
yield liquidity measurement problems.
---------------------------------------------------------------------------

    Current data sources have different time stamp granularity
standards. Many public data sources report time in seconds or
milliseconds and some,

including direct data feeds, report time in microseconds or
nanoseconds. For example, the Options Price Reporting Authority
(``OPRA'') allows for time stamps in nanoseconds and the other SIPs
require time stamps in microseconds for equity trades and quotes,
whereas the short sale transactional data released by exchanges
contains time stamps in seconds.\441\ Currently, OATS requires time
stamps in milliseconds for firms that capture time in milliseconds, but
does not require members to capture time in milliseconds.\442\ EBS
trade times are recorded only to the second; other EBS records must
contain time stamps containing only the transaction date. The lack of
uniform and granular time stamps can limit the ability of regulators to
sequence events accurately and to link data with information from other
data sources.
---------------------------------------------------------------------------

    \441\ See OPRA Option Price Reporting Authority Binary
Participant Interface Specification Version 1.7 (January 2015),
available at http://www.opradata.com/specs/opra_binary_part_spec.pdf; see also NYSE, Modified Timestamps and
Additional Timestamp Information for Daily TAQ (June 22, 2015),
available at http://www.nyxdata.com/nysedata/default.aspx?tabid=993&id=2784; UTP Vendor Alert #2015-7, supra note
435, regarding additional time stamps to be reported to the SIP.
    \442\ See FINRA Rule 7440 (providing that ``[e]ach required
record of the time of an event shall be expressed in terms of hours,
minutes, and seconds; provided that the time of an event shall be
expressed in hours, minutes, seconds, and milliseconds if the
member's system captures time in milliseconds.''). The Commission
approved the requirement that time be expressed in milliseconds if
the member's system captures time in milliseconds on February 27,
2014. See Securities Exchange Act Release No. 71623 (February 27,
2014), 79 FR 12558 (March 5, 2014); see also, FINRA, Equity Trade
Reporting and OATS, Regulatory Notice 14-21 (May 2014), available at
http://www.finra.org/sites/default/files/NoticeDocument/p506337.pdf.
---------------------------------------------------------------------------

C. Linking and Combining Data
    Sometimes one order or market activity event may be reflected in
information contained in various data sources or in different fields
within the same data source, and fully understanding that activity
requires linking information across the different data sources.
Therefore, regulators analyzing an event or running a surveillance
pattern often need to link data. For example, cross-market examinations
require the cumbersome and time-consuming task of linking many
different data sources.\443\ Regulators combine trading data from
sources such as public feeds, SRO audit trails, EBS data, and trade
blotters when reviewing surveillance alerts to determine whether
violations of rules such as Rule 611 of Regulation NMS occurred \444\
or to examine, for example, whether an entity availing itself of a
market maker exemption is engaging in bona fide market making. In fact,
the data needed for an examination often consist of many audit trails
and are stored in non-uniform formats.\445\ In addition, the analysis
and reconstruction of market events could require linking many
different data sources, such as a dozen SRO audit trails.
---------------------------------------------------------------------------

    \443\ Such linking is typically conducted electronically with an
algorithm unless the size of the data set is small. This requires
the person attempting to combine and link the data to write computer
code to identify and match the records that need to be linked. This
task involves extensive testing and debugging the first time that
person tries to combine and link those specific data sources.
Further, given the variation in formats across broker-dealers and
other data sources, the code may need to change for each
investigation, requiring a repeat of the extensive testing and
debugging process.
    \444\ 17 CFR 242.611.
    \445\ In the context of the CAT NMS Plan, the Commission does
not distinguish data format from data taxonomy. See Section III.B.3,
supra. In discussing data format, the Commission combines data
format with data taxonomy. Id. The distinction between format and
taxonomy is not significant in the context of the CAT NMS Plan
because the Plan does not specify either for incoming data and the
Plan effectively requires uniformity in both for regulator access.
Id. SRO audit trails currently differ in both format and taxonomy as
do many other trading and order data sources.
---------------------------------------------------------------------------

    Regardless of whether order lifecycle reports are reflected in the
same or different data sources, the process of linking lifecycle events
is complex and can create inaccuracies. Merging different data sources
often involves translating the data sources into the same format,\446\
which can be a complex process that is prone to error. Linking records
within or across data sources also requires the sources to share ``key
fields'' that facilitate linkage, along with a successful linking
algorithm. Regulators may be unable to link some data source
combinations accurately because the data sources do not have key fields
in common or the key fields are not sufficiently granular. For example,
regulators cannot always link trade records accurately to EBS records.
The EBS records contain a symbol and date, but the price and size on
the records may reflect multiple trades spread over a period of time.
Sometimes, different data sources may have key fields in common but the
relationship between the fields is not straightforward. In these cases,
the algorithm to link them may be necessarily complex and not entirely
successful. Further, within a single order lifecycle, the order number
may change when a broker-dealer routes the order to another broker-
dealer or exchange or even to another desk at the same broker-dealer.
The inability to link all records affects the accuracy of the resulting
data and can force an inefficient manual linkage process that would
delay the completion of the data collection and analysis portion of the
examination, investigation, or reconstruction.
---------------------------------------------------------------------------

    \446\ For example, different data sources can format dates and
times differently or may use different notations to signify that the
field contains no value.
---------------------------------------------------------------------------

D. Customer and Broker-Dealer Identifiers
    The data sources described in Section IV.D.2.a also lack consistent
customer and broker-dealer identifiers, which limit regulators' ability
to track the activity of one client or broker-dealer across the market.
There is no standard convention for how broker-dealers identify
customers.
    Regulators face challenges in tracking broker-dealers' activities
across markets due to inconsistent identifiers and a lack of a
centralized database. These challenges occur primarily in the context
of regulatory activities that require manual or ad hoc data analysis,
as is often the case in particular investigations, examinations, and
market studies. In the case of broker-dealers, SROs generally identify
their members within their data using market participant identifiers
(``MPIDs''). However, the MPIDs that identify broker-dealers on
Execution Venues are not standardized across venues; consequently, a
broker-dealer identified as ``ABCD'' on one venue may be identified
differently on another venue, where ``ABCD'' may refer to a different
broker-dealer entirely. Therefore, aggregating a broker-dealer's
activity across venues requires verifying the MPIDs assigned to a
broker-dealer on each venue, usually referencing the broker-dealer by
its Central Registration Depository (``CRD'') number.\447\ In the
course of manual data analysis, the Commission notes that its Staff
have experienced challenges in identifying broker-dealers using CRD
numbers. These challenges can be due to the fact that, although every
broker-dealer has a CRD number, a broker-dealer that routes an order
seldom, if ever, provides a CRD number to the broker-dealer that
accepts the order.\448\
---------------------------------------------------------------------------

    \447\ The CRD is an automated database operated by FINRA that
stores and maintains information on broker-dealers and their
registered persons relating to their licensing, registration,
complaints, professional background, and disciplinary history. Each
broker-dealer and their registered persons are assigned a CRD number
for identification.
    \448\ The Commission and the SROs have generally overcome these
challenges in the context of automated regulatory data analysis, and
found ways to reduce these challenges in some manual data analysis
and can efficiently track broker-dealers across venues. The
Commission understands that FINRA can track broker-dealers across
venues pursuant to its responsibilities under a plan for allocating
regulatory responsibilities pursuant to Rule 17d-2. On September 12,
2008, the Commission declared effective a plan for allocating
regulatory responsibilities pursuant to Rule 17d-2 filed by the
American Stock Exchange, LLC, Boston Stock Exchange, Inc., CBOE
Stock Exchange, LLC, CHX, FINRA, ISE, NASDAQ, NSX, NYSE, NYSE Arca,
NYSE Regulation, Inc., and Philadelphia Stock Exchange, Inc. (the
``Participating Organizations,'' which have since been updated to be
the following SROs: BATS, BYX, CBOE, CHX, EDGA, EDGX, FINRA, NASDAQ
OMX BX, NASDAQ OMX PHLX, NASDAQ, NSX, NYSE, NYSE MKT [f/k/a NYSE
Amex], and NYSE Arca) (``Insider Trading Rule 17d-2 Plan''). The
Insider Trading Rule 17d-2 Plan allocates regulatory responsibility
over common FINRA members (members of FINRA and at least one of the
Participating Organizations) (collectively ``Common FINRA Members'')
for the surveillance, investigation, and enforcement of (i) Federal
securities laws and rules promulgated by the Commission pertaining
to insider trading, and (ii) the rules of the Participating
Organizations that are related to insider trading (``common insider
trading rules''). Under that Plan, the Participating Organizations,
other than FINRA, have been relieved of regulatory responsibility
over Common FINRA Members (i.e., the broker-dealer and its
associated persons) for surveillance, investigation, and enforcement
of the common insider trading rules over such persons with respect
to ``Listed Stocks'' (as defined in that Plan). Accordingly, FINRA
retains regulatory responsibility for Common FINRA Members with
respect to the common insider trading rules--irrespective of the
market(s) on which the relevant trading may occur. Separately, FINRA
performs investigations and enforcement with respect to non-Common
FINRA Members pursuant to a regulatory services agreement between
FINRA and several of the other Participating Organizations. See
Securities Exchange Act Release No. 58536 (September 12, 2008), 73
FR 54646 (September 22, 2008); see also Securities Exchange Act
Release Nos. 58806 (October 17, 2008), 73 FR 63216 (October 23,
2008); 61919 (April 15, 2010), 75 FR 21051 (April 22, 2010); 63103
(October 14, 2010), 75 FR 64755 (October 20, 2010); 63750 (January
21, 2011), 76 FR 4948 (January 27, 2011); and 65991 (December 16,
2011), 76 FR 79714 (December 22, 2011).

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

    Regulators sometimes find it necessary to analyze trading activity
at the customer level instead of the broker-dealer level. Consistently
identifying customer account owners across the multiple broker-dealers
with whom they transact is difficult and prone to error. Although, for
example, the EBS system provides the names associated with each account
traded, these names are drawn from the separate records of each broker-
dealer providing data to the EBS system, and the same party may be
identified by a different name across multiple broker-dealers. Further,
the lack of tax identification numbers in many EBS records limits the
ability for regulators to trace the trading activity of customers
across broker-dealers. Tax identification numbers are not required to
be reported in EBS for average price, allocation, riskless principal,
foreign accounts, and subaccounts. In fact, when one broker-dealer
executes for a second broker-dealer, the tax identification number is
that of the second broker-dealer regardless of whether the second
broker-dealer is trading for a customer.
E. Aggregation
    The practice used in some data records of bundling together data
from different orders and trades also can make it difficult to
distinguish the different orders and trades in a given bundle. As an
example, brokers frequently utilize average-price accounts to execute
and aggregate multiple trades for one or more customers. In these
cases, for example with EBS data, the system does not reflect the
details of each individual trade execution, because it reports only the
average aggregate prices and volumes of the various trades within a
series that have been bundled together for reporting purposes. Further,
information on trade allocations aggregate the trade information to
such an extent that it is difficult for regulators to identify when
particular clients may be afforded preferential treatment because it is
challenging to link subaccount allocations to orders and trades.
    Equity and options cleared reports provide valuable data to
regulators, but aggregation reduces their usefulness, because the
reports do not have detailed trade information and do not include
activity that does not require clearing.\449\ The volume in these
reports cannot be fully disaggregated and reconciled with the equity
trade execution volume from other data sources used by the Commission,
e.g., TAQ and MIDAS, because the volume in the cleared reports is not
necessarily a summation of all trades. For example, the same trade can
be reported two or more times, by both the buy and the sell sides, for
some OTC transactions and for all trades in NASDAQ exchanges.\450\
Similarly, option cleared reports bundle together multiple executions
by compressing or netting them to facilitate clearing. This aggregation
limits regulators' ability to link records across data sources, as well
as limiting the accuracy with which the data source reflects market
events, which is particularly problematic in applications that require
market reconstruction.
---------------------------------------------------------------------------

    \449\ The option cleared volume from the OCC contains the
clearing firm, number of customer contracts, and number of firm
contracts for the options.
    \450\ This scenario of a trade being reported several times is
generally the result of agreements that permit a broker-dealer to
clear trades on behalf of another broker-dealer and send trades
directly to the NSCC. Broker-dealers often enter into these
agreements to simplify their clearing processes, achieve lower
transaction costs, and take advantage of extended hours of service.
---------------------------------------------------------------------------

    Finally, issuer repurchase information is aggregated at the monthly
and quarterly level.\451\ This aggregation limits the use of such data
in investigations of the timing of issuer repurchases and issuer stock
price manipulation and in analysis of the use of the Rule 10b-18 issuer
repurchase safe harbor.\452\
---------------------------------------------------------------------------

    \451\ Issuers report quarterly and monthly repurchases pursuant
to Item 703 of Regulation S-K. This data includes all issuer
repurchases, including tender offers and open market repurchases,
but does not distinguish the type of repurchase. The Commission
notes that Item 703 provides, in part, that issuers must disclose
``the number of shares purchased other than through a publicly
announced plan or program and the nature of the transaction (e.g.,
whether the purchases were made in open-market transactions, tender
offers, in satisfaction of the company's obligations upon exercise
of outstanding put options issued by the company, or other
transactions.'' See 17 CFR 229.703.
    \452\ Rule 10b-18 provides issuers with a ``safe harbor'' from
liability for manipulation under Section 9(a)(2) of the Act, 15
U.S.C. 78i(2), and Rule 10b-5 thereunder, 17 CFR 240.10b-5, solely
by reason of the manner, timing, price, and volume of their
repurchases when they repurchase common stock in the market in
accordance with the Section's manner, timing price, and volume
conditions. See 17 CFR 240.10b-18.
---------------------------------------------------------------------------

(3) Accessibility
    The SROs and Commission also lack direct access--meaning the
ability to log into a system in a manner that would allow them to
gather and analyze the data they need--to many of the data sources
described above. SROs generally have direct access only to their own
audit trails and the public data feeds.\453\ While SROs control the
manner in which they access their own data, their investigations in
some cases require access to the data of other SROs because firms could
trade across multiple SROs. To access another SRO's data, SROs must
send requests to the other SROs \454\ or to the ISG.\455\ SROs needing
information not included in their audit trails or the audit trail of
another SRO must request such information from their members. The SROs
might not be able to acquire data from entities that are not members of
that SRO; non-members are not obligated to provide SROs with data,\456\
any data provided by

the regulator of the non-member firm would be on a voluntary basis, or
pursuant to the terms of the ISG Agreement.
---------------------------------------------------------------------------

    \453\ FINRA does receive data from certain SROs on a daily basis
and subsequently has direct access to that data.
    \454\ Commission staff understands that SROs receiving
information requests from other SROs will typically provide the
information, although they are not required to do so.
    \455\ See supra note 399.
    \456\ See, e.g., NYSE Rule 2.A.xvi.--Jurisdiction (noting that
the exchange has jurisdiction over matters related to non-member
broker-dealers that choose to be regulated by the exchange). The
Commission may, by rule or order, subject non-members to the rules
of national securities exchanges if it deems it necessary or
appropriate in the public interest and for the protection of
investors, to maintain fair and orderly markets, or to assure equal
regulation. Section 6(f)(2) of the Act, 15 U.S.C. 78f(f)(2); see
also Sections 6(b)(1), 15A(b)(2) of the Act, 15 U.S.C. 78f(b)(1),
78o-3(b)(2) (requiring national securities exchanges and securities
associations, respectively, to have the capability to enforce
compliance by their members with applicable Exchange Act
requirements and exchange or association rules).
---------------------------------------------------------------------------

    The Commission has direct access only to the public data feeds and
the equity and option cleared data; it lacks direct access to
information provided in EBS or contained in trade blotters, order
tickets, order handling data, SRO audit trails, and OATS data. Unlike
the SROs, the Commission can subpoena data from entities that are not
registered with the Commission, such as professional traders that are
neither broker-dealers nor investment advisers.
    If a regulator does not have direct access to data it needs, the
regulator would request it. This can result in many data requests to
broker-dealers, SROs, and others,\457\ which are burdensome to fill.
The Commission recognizes that data requests could impose burdens on
the entities responding to the request, in addition to the burden on
the regulators to put the request together. Broker-dealers, investment
advisers, and SROs responding to a data request must incur costs in
order to produce, store, and transmit the data for the Commission or
SRO.\458\ Further, as indicated above, regulators may need to request
the data needed from many different data providers because of
fragmentation in the data, and thus one analysis, such as an
investigation, can generate many data requests.
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    \457\ In the context of an investigation or a court, in
litigation, the Commission can request or subpoena information from
entities, including those not registered with the Commission. See
SEC Rule of Practice 232. Pursuant to their rules, SROs can request
information from their registered entities; see also supra notes
454-456 and accompanying text (discussing how SROs request
information from other parties, including other SROs).
    \458\ See, e.g., CAT NMS Plan, supra note 3, at Appendix C,
Section B.7(b)(ii)(B) (discussing the current process for broker-
dealers and SROs to respond to data requests, and stating that
broker-dealers must commit staff to respond to requests for EBS or
large trader data and may take varied approaches to fulfilling their
regulatory reporting obligations).
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    Fragmentation in trade and order data can take many forms. First,
an analysis may require the same type of data from many market
participants. Second, the required data fields for an analysis may be
reflected in different types of data. Finally, an analysis may require
data on different products covered in separate data sources. The
fragmentation in the data across market participants is a function of
the fragmentation of trading and broker-dealer services. In today's
equity markets, trades execute across 12 exchanges, more than 40 ATSs,
and around 250 dealers.\459\ With its RSAs, FINRA can consolidate much
of the SRO audit trails in equities.\460\ In the options markets, 14
different exchanges trade listed options with no off-exchange trading
of standardized options and no entity aggregating each audit trail into
one dataset. The vast majority of stocks trade in more than one
location and most options trade on multiple exchanges.
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    \459\ See Securities Exchange Act Release No. 76474 at 81008,
81112, ``Regulation of NMS Stocks'' (November 2015), available at
http://www.sec.gov/rules/proposed/2015/34-76474.pdf; see also Laura
Tuttle, OTC Trading: Description of Non-ATS OTC Trading in National
Market System Stocks (March 2014), available at http://www.sec.gov/dera/staff-papers/white-papers/otc-trading-white-paper-03-2014.pdf.
    \460\ FINRA has access to data from OATS and each equities
exchange except CHX. See supra note 333 and accompanying text. This
reduces the data fragmentation as it relates to the number of data
requests for equities.
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    Exchange SROs generally limit their data collection to securities
traded on their own exchanges, and limit the scope of their audit
trails to transactions occurring on their exchanges. While ATSs and
dealers report order events in equities to OATS, each of the 12
equities exchanges has its own audit trail. As a result of this
structure, a market reconstruction for a single security may involve
data requests to multiple exchanges. Likewise, a project involving
options data may require data from each of the 14 options exchanges.
    To acquire broker-dealer order records, EBS, trade blotters, and
order tickets, regulators need to send a request to each broker-dealer
to obtain its data. In the Commission's experience requested data can
suffer from missing variables, truncations, and formatting problems due
to the way that the data is queried by the broker-dealer. These
problems can lead to substantial delays in using data and loss in
regulatory productivity. Many different broker-dealers could have
trading records in a given security on a given day of interest, so one
narrow investigation could generate many data requests. As a result, in
2014 the Commission made 3,722 EBS requests that generated 194,696
letters to broker-dealers for EBS data. Likewise, the Commission
understands that FINRA requests further generate about half this number
of letters. In addition, for examinations of investment advisers and
investment companies, the Commission makes approximately 1,200 data
requests per year. Further, an investigation that requires tracing a
single trade or a set of trades back to an investor or investors can
generate many data requests. For such investigations, regulators would
first need to request data from the exchanges or market participants
executing the trades. This data would tell the regulators which
members, subscribers, or broker-dealers sent the orders that led to the
executions. Regulators would then need to go to the members,
subscribers, and broker-dealers to get information on the orders and
repeat until they get to the broker-dealer who initiated the order to
see the customer behind the order.
    Finally, some regulatory activities require data on both equities
and options. Because current data sources do not contain information
regarding both equities and options, regulators needing data on both
types of securities would need to make several data requests. Closely
related securities are sometimes traded on entirely different
exchanges, complicating cross-product analyses. For example, COATS data
covers options trades but excludes the trading of the underlying
assets. Often investigations or analyses require examining both options
and their underlying assets, creating the need for regulators to
request data from multiple sources.
    This data fragmentation also results in disparate requirements for
industry members to record and report the same information in multiple
formats. Because each SRO has its own data requirements, a market
participant that is a member of multiple SROs may be required to report
audit trail data in numerous formats and interact with multiple
regulators in response to normal data queries. That said, the
Commission understands that the number of disparate formats faced by
each member may have reduced over the past several years.\461\
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    \461\ For example, some exchange audit trails require floor
brokers who operated on their own systems to submit order records to
the exchange. These same floor brokers could be members of other
SROs that require different formats for submitting order reports.
The Commission understands that the volume of trading conducted on
an exchange but not on the exchange's systems has declined sharply.
Therefore, the activity generating the disparate reporting
requirements has declined.
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(4) Timeliness
    In order to respond promptly to market events, regulators must be
able to obtain and analyze relevant data in a timely fashion.
Currently, obtaining trade and order data and converting the

data into a form in which they can be analyzed can involve a
significant delay from the time of a particular event of interest.
Indeed, in some cases the length of time from when an event occurs
until regulators can use relevant data in an investigation or analysis
can be weeks or months. This is especially true for trading data that
includes customer information.
    Some of the data sources described above can be accessed by SROs
and the Commission without significant delay. For example, SROs and the
Commission have some real-time direct access to public data and,
through MIDAS, the Commission has next-day direct access to analytics
that are based on public data, such as volumes over various time
horizons. Regulators can also sometimes request and receive trade
blotter data on the same day as the trade(s) of interest because trade
blotters are generally stored in systems immediately.\462\ Further, the
Commission understands that FINRA receives audit trail data from
exchanges pursuant to RSAs at the end of each trading day. However, it
has been the Commission's experience that trade blotter data requests
can take weeks or in excess of a month depending on the scope of the
request and how accustomed the broker-dealer is with fulfilling such
requests.
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    \462\ The regulated entities that respond to data requests need
to query data to respond to the request while still maintaining
normal operations. Large data requests can take significant
computing time and thus, may require the respondents to time the
queries to minimize disruptions. Further, respondents need to write
code to execute the query. More experienced respondents would have
existing code that they could modify without significant debugging
whereas less experienced respondents would need to take time to code
and debug their queries.
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    Corrected FINRA OATS data may be available less than two weeks
after an event and uncorrected data on day T+1. In particular, FINRA
members submit OATS data on a daily basis, submitting end-of-day files
by 8:00 a.m. Eastern Time the following day or they are marked late by
FINRA.\463\ FINRA acknowledges receipt of the data an hour after the
member submits it, before running its validation process. FINRA then
takes approximately four hours after acknowledging receipt of OATS data
to determine if the data contain any syntax errors.\464\ In addition to
the four hours needed to identify errors within a report, it takes
another 24 hours for context checking, which identifies duplicates or
secondary events without an originating event. Once a context rejection
is available, the member has up to five business days to repair the
rejection.\465\ Reports for files that contain internally inconsistent
information about processing, linking, and routing orders may be
available within two business days. FINRA attempts to match the
inconsistent information against any additional data received up to day
T+2 for linking errors and day T+30 for routing errors. The timing for
surveillance programs varies depending on the type of surveillance
being performed; data is assumed to be completely processed and
corrected at day T+8.\466\
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    \463\ FINRA currently receives exchange data from most SROs at
the end of the trading day. Information on broker-dealer data
reporting timeframes is available at OATS Reporting Technical
Specifications, supra note 357, at 8-1; see also Adopting Release,
supra note 9, at 45768 n.504.
    \464\ See Section IV.D.2.b(2)A, supra (providing more detail on
the validation and error checking process for OATS and other data
sources).
    \465\ See OATS Reporting Technical Specifications, supra note
357, at 6-3. Other types of errors and corrections adhere to
slightly different time-lines. See, e.g., id. at 6-12.
    \466\ FINRA has the capability to query data that is not fully
corrected, processed and linked to investigate market activity at
T+1.
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    Because market participants generally do not report or compile
datasets immediately after an order event, there is a delay before
regulators may access some data sources. For example, the compilation
of equity and option cleared reports occurs on day T+1 for options and
day T+3 for equities (i.e., the clearing day) and the electronic query
access for equities is available from SIAC on day T+3. Additionally,
when broker-dealers receive a request for EBS, the firm must first fill
in the EBS report and then, if it does not self-clear, pass the reports
on to its clearing firm to compile and send to SIAC. The EBS submission
process can take up to ten business days. More immediate requests for
cleared options data can be submitted to FINRA, but even this process
takes up to two days. Because EBS data do not contain order entry time
and order execution time, regulators must obtain this information from
firms and brokers using either data requests or subpoenas, and this
process generally can take from two to four weeks depending on the size
of the request.
    As discussed above,\467\ the lack of direct access to most data
sources may further delay the ability of regulators to use data in
certain cases. When regulators have direct access to a data source, the
time needed to receive data is only the time it takes for a query to
run. For example, depending on the scope of the search, it can take
just a few minutes to return the results of a query of equity and
option clearing data.\468\ As a result of direct access to their own
audit trails, some SRO surveillance occurs on the same day as the
trading activity. FINRA, however, typically gets direct access to
exchange data, uncorrected OATS data, and corrected OATS data at the
time it receives it, unlike the exchanges and broker-dealers that have
some access to the data as it is generated.\469\ However, when
regulators lack direct access, their data requests can consume
significant time, including both the time required to put the request
together and response times from the SROs, broker-dealers, and others
producing the data.\470\ For example, obtaining complete responses from
each broker-dealer for an EBS request can take days or weeks depending
on the scope of the request. Likewise, responses from the ISG for SRO
audit trail data can take days or weeks.
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    \467\ See Section IV.D.2.b(3), supra.
    \468\ MIDAS, one example of a direct access data source, queries
return data in seconds for single ticker, intraday queries and
within hours for complex multi-ticker, multi-day queries. The data
response times from MIDAS vary depending on the format of the
resulting data and the number of other users on the system. A query
that pulls all message traffic in an equity on a single day would
take around thirty minutes.
    \469\ FINRA typically collects exchange data at the end of the
trading day and, as noted above, OATS on T+1. FINRA can begin to
access each data source, but, as discussed below, FINRA has direct
access to combined data only after the completion of the OATS error
process and the processing necessary to reformat and merge the data
sources.
    \470\ As discussed above, because analysis of some events
requires the collection of data from numerous sources, the time to
request and receive data may be significant. The more fragmented the
necessary data is, the longer it would take regulators to put
together the data request. Putting together an EBS request, for
example, could involve first identifying to which broker-dealers to
send the requests and then manually creating a request letter for
each broker-dealer. The Commission does recognize, however, that
regulators can request and receive trade blotter data on the same
day as the trade event if the request is for a small amount of data
from an experienced provider. In fact, two years of trade blotter
data from an experienced investment adviser can take several days
while two years of data from clearing firms can take six weeks to
several months.
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    Once regulators receive requested data, the data often have to be
processed into a form in which they can be analyzed. As discussed
above,\471\ it can take considerable time for regulators to combine
data from different sources and link records from within or across data
sources. Furthermore, the lack of consistency in format adds complexity
to projects involving data from multiple data sources, even when the
project does not involve linking of these different data.\472\ For
example, the

Commission understands that FINRA takes approximately three days to
process exchange data to transform it into a common format and prepare
it for surveillance. Therefore, FINRA cross-market surveillances and
surveillance of the off-exchange market typically assumes data is fully
corrected and processed on T+8.\473\ Any processing that requires
linking order life-cycle events or other types of data can be time
consuming to perform, even if all of the data comes from the same data
source.\474\ In some cases, the laborious process of assembling the
data delays other critical investigative or analytical steps.
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    \471\ See Section IV.D.2.b(2)C, supra.
    \472\ Because no single data source is complete, regulators
often need to combine data across sources to get a full picture. For
example, regulators may need to compile SRO audit trail records from
multiple SROs. Not all SROs collect data using the OATS format. The
different data formats implemented by SROs thus involve a
significant investment of staff time to reconcile. In addition, each
options exchange maintains its own COATS audit trail in a different
format and includes different supplemental data items in its audit
trail. These differences make it difficult and labor intensive for
regulators to view options trading activity across multiple markets.
    \473\ FINRA can access data as soon as T+1 when necessary.
    \474\ The first step in linking involves finding a key to link
the records. The key can be one field or a series of fields in the
data. The second step involves designing an algorithm to use the key
to link records. If each data source formats or stores the fields in
the key differently, the algorithm can be complex. Even within a
single data source, the creation of the algorithm may be complicated
because the fields needed to build the key can change with each
market participant. For example, each member can report a different
order ID for the same order, and this order ID may even change
within the same member. The algorithm for linking needs to recognize
how order IDs change and use additional information in the order