[Federal Register: June 8, 2010 (Volume 75, Number 109)]
[Proposed Rules]
[Page 32555-32610]
[DOCID:fr08jn10-38]

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Part II

Securities and Exchange Commission

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17 CFR Part 242

Consolidated Audit Trail; Proposed Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

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

Consolidated Audit Trail

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

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

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

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File No. S7-11-10 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
    All submissions should refer to File No. S7-11-10. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549 on official business days between the hours of 10 a.m. and 3 p.m.
All comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Rebekah Liu, Special Counsel, at (202)
551-5665; Jennifer Colihan, Special Counsel, at<PHONE_NUMBER>, or
Leigh W. Duffy, Attorney-Adviser, at<PHONE_NUMBER>, Division of
Trading and Markets, Securities and Exchange Commission, 100 F Street,
NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Basis for Proposed Rule
III. Description of Proposed Rule
IV. Request for Comments
V. Paperwork Reduction Act
VI. Consideration of Costs and Benefits
VII. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition and Capital Formation
VIII. Consideration of Impact on the Economy
IX. Initial Regulatory Flexibility Act Analysis
X. Statutory Authority

I. Background

    The U.S. securities markets have undergone a significant
transformation over the last few decades, and particularly in the last
few years. Regulatory changes and technological advances have
contributed to a tremendous growth in trading volume and the further
distribution of order flow across multiple trading centers. Today's
markets are widely dispersed, with securities often trading on multiple
markets, including over-the-counter (``OTC''). Additionally, products
that are closely related in nature and objective are also traded on
different markets. For example, various markets trade either options on
the S&P 500 index,\2\ futures on the S&P 500 index,\3\ exchange traded
funds (``ETFs'') based on the S&P 500 index,\4\ and options and futures
on those ETFs.\5\ This dispersion of significant trading volume has led
the Commission in the past to ask for comment on how best to enhance
the capability of SROs and the Commission to effectively and
efficiently conduct cross-market supervision of trading activity.\6\
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    \2\ The Chicago Board Options Exchange, Incorporated (``CBOE'')
lists options on the S&P 500 Index (SPX) and on the Mini-S&P 500
Index (XSP) (1/10th the value of the S&P 500 Index).
    \3\ For example, the Chicago Mercantile Exchange Inc. (``CME'')
offers S&P 500 futures and ``E-Mini'' futures on the S&P 500 Index
($50 x S&P 500 Index price).
    \4\ For example, NYSE Arca, Inc. (``NYSE Arca'') lists an ETF
based on the S&P 500 SPDR (SPY) and the iShares S&P 500 Index Fund
(IVV).
    \5\ For example, OneChicago, LLC lists futures on the SPY, and
CBOE lists options on the iShares S&P 500 Value Index Fund.
    \6\ See infra Section I.G. (discussing past Commission requests
for comment on regulation of intermarket trading).
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    The individual SROs are responsible for regulating their markets
and their members.\7\ Further, the Commission has responsibilities to
oversee the SROs, the securities markets, and registered broker-
dealers, and routinely conducts examinations of or investigations into
trading activity as part of its oversight and enforcement programs.\8\
The SROs and the Commission need tools to

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

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

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

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

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

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

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

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

    \53\ See OATS Reporting Technical Specifications, January 5,
2010, available at http://www.finra.org/web/groups/industry/@ip/
<EMAIL_ADDRESS>---------------------------------------------------------------------------

D. NYSE's Order Tracking System

    The Commission instituted public administrative proceedings against
the NYSE in 1999, alleging that the exchange had failed to detect
violations of federal securities laws and its own rules by its
independent floor broker members, failed to police for performance-
based compensation arrangements involving these members, and failed to
adequately surveil them.\54\ In settling the Commission's enforcement
action, the NYSE was ordered to continue its development of an
electronic floor system for the entry of order details prior to
representation on the exchange floor, as well as to design and
implement an audit trail to enable it to effectively surveil and
reconstruct its market promptly, and facilitate the NYSE's effective
enforcement of the federal securities laws and exchange rules.\55\ Like
OATS, this audit trail was required to provide an accurate, time-
sequenced record of orders, quotations and transactions, documenting
the life of an order from receipt through execution or cancellation.
The NYSE also was required to provide for synchronization of all clocks
used in connection with the audit trail.\56\
---------------------------------------------------------------------------

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

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

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

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

     For order receipt or origination,\61\ the date and time
the order is originated or received by a member or member organization;
a unique order identifier; market participant symbol; and the material
terms of the order; \62\
---------------------------------------------------------------------------

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

     For the internal or external routing of an order, the
unique order identifier; the identification of the department to which
an order was transmitted if transmitted internally; the date and time
the order was received by the department receiving a transmitted order;
the market participant symbol assigned to the member or member
organization receiving the transmitted order or notation that the order
was transmitted to a non-member; \63\ the material terms of the order
as transmitted; \64\ and the date and time the order is transmitted;
and
---------------------------------------------------------------------------

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

     For the modification or cancellation of an order, a new
unique order identifier; the original unique order identifier; and the
date and time a modification or cancellation was originated or
received.\65\
---------------------------------------------------------------------------

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

    Additionally, the NYSE and NYSE Amex require the recording of
detailed information concerning the receipt, cancellation or execution
of orders in NYSE and NYSE Amex-listed cash equity securities
originated on or transmitted to the exchange floor.\66\ Immediately
following receipt of an order on the floor, the member receiving the
order must record the following information: (1) The material terms of
the order; \67\ (2) a unique order identifier; (3) the clearing member
organization and the identification of the member or member
organization recording order details; \68\ and (4) modification of
terms of the order or cancellation of the order.\69\
---------------------------------------------------------------------------

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

    Further, once an order is executed, the following information must
be recorded: (1) The material terms of the execution; \70\ (2) the
unique order identifier; (3) the identity of the firms involved in the
execution; \71\ and (4) certain other information related to the
execution.\72\
---------------------------------------------------------------------------

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

E. Consolidated Options Audit Trail System

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

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

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

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

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

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

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

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

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

F. Other Audit Trail Requirements

    SRO audit trail rules regarding information on orders for NMS
stocks to be recorded by their members, and in some cases provided to
the SRO, tend to be less uniform than SRO audit trail rules relating to
listed options.\84\ Some exchanges and FINRA have detailed audit trail
data submission requirements for their members covering order entry,
transmittal, and execution.\85\ For example, the rules of one exchange
require the recording of the following information for each order
originating with an exchange participant that is given to or received
from another participant for execution, transmitted by an exchange
participant to another market, or originating off the exchange and
transmitted to an exchange participant, and subsequent execution of any
such orders: \86\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

G. Prior Commission Request for Comment

    The Commission has previously requested comment regarding cross-

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

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

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

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

    In response to the Intermarket Trading Concept Release, the
Commission received a variety of comments on intermarket surveillance
and order audit trail issues.\99\ Of those commenters that addressed
the general concept of creating a uniform electronic audit trail, some
supported the concept while others did not.\100\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

    Another commenter gave an example of how it believed the lack of
real time reporting across markets was detrimental to surveillances
relating to certain illegal activities. This commenter stated its
belief that ``effective surveillances relating to insider trading,
market manipulation and stock or options frontrunning in multiple
markets can be hindered because away-market data such as order
information, position limit reports and large position reports (for
options) are not available electronically on a real time or near real
time basis to the SRO that has generated an alert or flag in the course
of its routine surveillance.\119\ This commenter suggested that
consolidating this type of data in real time or near real time would
permit SROs to immediately detect and review all aberrational activity
in the multiple market centers, which could significantly deter or
prevent violative conduct.\120\
---------------------------------------------------------------------------

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

    Another commenter stated its belief that the lack of a coordinated
surveillance system is potentially one of the more significant problems
facing the markets, and that as trading strategies become more
sophisticated across multiple markets and national borders, the
potential for sophisticated fraud also increases.\121\ One commenter
recommended a consolidated information base that all regulators could
access, stating that ``having separate and uncoordinated regulatory
data is inefficient and detracts from the quality of regulation.''
\122\ Further, another commenter suggested a voluntary regulatory
cooperative, jointly owned by participant exchanges, that would be the
central regulator for surveillance, investigations and examinations and
would include an electronic interface with the SEC; this commenter
believed that the costs of developing an intermarket consolidated order
audit trail system should be justified by the regulatory value of the
data to be captured.\123\
---------------------------------------------------------------------------

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

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

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

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

    Section 11A(a)(3)(B) of the Exchange Act provides in part that the
Commission may, by rule, require SROs to act jointly with respect to
matters as to which they share authority under the Exchange Act in
regulating an NMS for securities.\128\ Pursuant to this authority, the
Commission today is proposing a rule that would require all national
securities exchanges and national securities associations to jointly
submit to the Commission an NMS plan to create, implement, and maintain
a consolidated audit trail that would be more comprehensive than any
audit trail currently in existence.\129\ The proposed Rule would
require the consolidated audit trail to capture certain information
about each order for an NMS security, including the identity of the
customer placing the order and the routing, modification, cancellation
or execution of the order, in real time. In effect, the proposal would
create a time-stamped ``electronic audit trail record or report'' for
every order, and each market participant that touches the order would
be required to report information about certain reportable events, such
as routing or execution of the order.
---------------------------------------------------------------------------

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

    The Commission preliminarily believes that a consolidated order
audit trail, such as the one proposed today, could enhance the ability
of the SROs to carry out their obligations to regulate their markets
and their members. The Commission also preliminarily believes that the
proposed consolidated order audit trail could aid the Commission in
fulfilling its statutory obligations to oversee SROs,\130\ monitor for
the manipulation of security prices,\131\ and detect the use of
manipulative or deceptive devices in the purchase or sale of a
security,\132\ as well as to perform market reconstructions.
---------------------------------------------------------------------------

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

    The Commission preliminarily believes that proposed Rule 613 would
benefit the industry, through potential cost reductions, by eliminating
the need for certain SRO and Commission rules that currently mandate
the collection and provision of information, at least with respect to
NMS securities.\133\ The Commission also preliminarily believes that
the proposal would benefit SROs, as well as the NMS for NMS securities,
by ultimately reducing some regulatory costs, which may result in a
more effective re-allocation of overall costs.\134\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    The lack of cohesive, readily available order and execution
information creates significant hurdles for investigators at both the
SROs and at the Commission. In order for SROs to investigate potential
violations of their rules and the federal securities laws and rules by
their members, the SROs should have the ability to analyze the
activities of their members taking place across different market
centers. This requires the accumulation and interpretation of data from
numerous, disparate sources sometimes presenting inconsistent
information. Similarly, the experience of the Commission staff shows
that the lack of a consolidated audit trail results in the investment
of significant resources to investigate potential market abuses. For
example, when investigating potential insider trading and other market
manipulations, Commission staff first obtains an equity cleared report
to identify the clearing broker-dealers for trades involving the stock
under investigation and the trading volume for a particular period of
time. Then staff sends document requests to those clearing broker-
dealers to identify the broker-dealers that executed trades in the
stock over that period of time. This process can be complicated further
by potential market manipulators that trade through small introducing
brokers or use offshore corporate accounts and prime brokerage or other
arrangements to conduct transactions. Commission staff also may request
trade data for additional time periods identified during the course of
the investigation, resulting in further delays. Commission staff thus
often must make multiple requests to broker-dealers to obtain
sufficient order information about the purchase or sale of a specific
security to be able to adequately analyze trading. These multiple
requests and responses can take a significant amount of time and delay
the Commission's efforts to analyze the data on an expedited
basis.\149\ While the investigative protocols of each SRO may differ
from those used by the Commission, in each case, collecting,
interpreting and analyzing diverse data sources is labor intensive and
time consuming.
---------------------------------------------------------------------------

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

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

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

B. Books and Records Requirements

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

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

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

C. Time Lags

    Current audit trail rules require that an SRO's members submit
order and execution information by the end of each business day (in the
case of OATS), or in certain cases, upon request by the regulating
entity (for instance, like OTS).\153\ End-of-day or upon request
reporting, by definition, limits regulators' ability to carry out real
time cross-market surveillance and investigations of market anomalies.
The Commission preliminarily believes that end-of-day reporting,
coupled with the current laborious process of identifying the ultimate
customer responsible for a particular securities transaction that may
take several days, weeks or even months, can impact effective oversight
by hindering the ability of SRO regulatory staff to identify
manipulative activity close in time to when it is occurring, and
respond to instances of potential manipulation quickly. This process
also hinders the Commission's ability to detect and investigate
potentially manipulative behavior. Manipulative activity by some market
participants can result in other market participants, such as retail
investors, losing money. The longer that manipulative behavior goes
undetected over time, the greater the potential harm to investors.
Further, timely pursuit of potential violations can be important in
seeking to freeze and recover any profits received from illegal
activity.
---------------------------------------------------------------------------

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

D. Access to Audit Trail Information

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

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

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

III. Description of Proposed Rule

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

A. Products and Transactions Covered

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

secondary market transactions in other securities, including equity
securities \165\ that are not NMS securities, corporate bonds,
municipal bonds, and asset-backed securities and other debt
instruments; \166\ credit default swaps, equity swaps, and other
security-based swaps; and any other products that may come under the
Commission's jurisdiction in the future. Further, the Commission
preliminarily believes that it would be beneficial to provide for the
possible expansion of the consolidated audit trail to include
information on primary market transactions in NMS stocks and other
equity securities that are not NMS stocks, as well as primary market
transactions in debt securities.\167\ Such information could be used to
monitor for violations of certain rules under the Exchange Act, such as
Regulation M and Rule 10b-5 under the Exchange Act.\168\ Further,
FINRA's transaction reporting requirements for debt securities already
cover primary market transactions in debt securities,\169\ and thus
FINRA members should already be recording information relating to such
transactions that could be included in an audit trail. The Commission
proposes that the scope of the Rule initially be limited to secondary
market transactions in NMS securities, however, to allow for a
manageable implementation of the proposed consolidated audit trail, and
because market participants already have experience with audit trails
for these types of transactions in these securities.
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    \164\ NMS security is defined in Rule 600(a)(46) of Regulation
NMS to mean any security or class of securities for which
transaction reports are collected, processed, and made available
pursuant to an effective transaction reporting plan, or an effective
national market system plan for reporting transactions in listed
options. 17 CFR 242.600(a)(46). NMS stock is defined in Rule 600(47)
to mean any NMS security other than an option. 17 CFR
242.600(a)(46). A listed option is defined in Rule 600(a)(35) of
Regulation NMS to mean any option traded on a registered national
securities exchange or automated facility of a national securities
association. 17 CFR 242.600(a)(35).
    \165\ Equity security is defined in Section 3(a)(11) of the
Exchange Act to include any stock or similar security; or any
security future on any such security; or any security convertible,
with or without consideration, into such a security, or carrying any
warrant or right to subscribe to or purchase such a security; or any
such warrant or right; or any other security which the Commission
shall deem to be of similar nature and consider necessary or
appropriate, by such rules and regulations as it may prescribe in
the public interest or for the protection of investors, to treat as
an equity security. See 15 U.S.C. 78c(a)(11).
    Rule 3a11-1 under the Exchange Act defines equity security to
include any stock or similar security, certificate of interest or
participation in any profit sharing agreement, preorganization
certificate or subscription, transferable share, voting trust
certificate or certificate of deposit for an equity security,
limited partnership interest, interest in a joint venture, or
certificate of interest in a business trust; any security future on
any such security; or any security convertible, with or without
consideration into such a security, or carrying any warrant or right
to subscribe to or purchase such a security; or any such warrant or
right; or any put, call, straddle, or other option or privilege of
buying such a security from or selling such a security to another
without being bound to do so. See 17 CFR 240.3a11-1.
    \166\ Asset-backed security means a security that is primarily
serviced by the cash flows of a discrete pool of receivables or
other financial assets, either fixed or revolving, that by their
terms convert into cash within a finite time period, plus any rights
or other assets designed to assure the servicing or timely
distributions of proceeds to the security holders; provided that in
the case of financial assets that are leases, those assets may
convert to cash partially by the cash proceeds from the disposition
of the physical property underlying such leases. See 17 CFR
229.1101(c)(1).
    \167\ A primary market transaction is any transaction other than
a secondary market transaction and refers to any transaction where a
person purchases securities in an offering. See, e.g., FINRA Rule
6710 (defining two types of primary market transactions for TRACE-
eligible securities, a List or Fixed Offering Price Transaction or a
Takedown Transaction).
    \168\ See 17 CFR 242.100 et. seq. and 17 CFR 240.10b-5. Rule 105
prohibits the short selling of equity securities that are the
subject of a public offering for cash and the subsequent purchase of
the offered securities from an underwriter or broker or dealer
participating in the offering if the short sale was effected during
a period that is the shorter of the following: (i) Beginning five
business days before the pricing of the offered securities and
ending with such pricing; or (ii) beginning with the initial filing
of such registration statement or notification on Form 1-A or Form
1-E and ending with the pricing. Thus, Rule 105 prohibits any person
from selling short an equity security immediately prior to an
offering and purchasing the security by participating in the
offering. The primary market transaction data would allow for the
ability to more quickly identify whether any participant in the
offering sold short prior to the offering.
    Rule 10b-5 prohibits any act or omission resulting in fraud or
deceit in connection with the purchase or sale of any security. The
primary market transaction data for bonds would allow for
identification of the cost basis for bond purchases by
intermediaries and make it easier to assess whether subsequent mark-
ups to retail investors in primary offerings are fair and reasonable
and, if not, whether there has been a violation of the antifraud
provisions of the federal securities laws.
    \169\ See FINRA Rule 6730(a)(5).
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    As discussed above, the Commission believes that implementing a
consolidated audit trail for NMS securities would aid the SROs in more