effectively and efficiently carrying out their regulatory
responsibilities. It would also assist the Commission in carrying out
its statutory responsibilities. The Commission further preliminarily
believes that a timely expansion of the scope of the consolidated audit
trail beyond NMS securities would be beneficial, as illegal trading
strategies that the consolidated audit trail would be designed to help
detect and deter, such as insider trading, may involve trading in
multiple related products other than NMS securities across multiple
markets.
    For example, the Commission routinely receives information relating
to possible upward manipulation of security prices in violation of
Sections 9(a) and 10(b) of the Exchange Act,\170\ and alleged abusive
short selling in the over-the-counter market, which includes FINRA's
Bulletin Board and Pink Sheets. If the consolidated audit trail were
expanded to cover these securities, it would be possible for SROs and
the Commission to make comparisons between current and historical data
in a more timely manner than is currently possible, to more quickly
determine whether or not a complaint merits additional attention and
the corresponding commitment of enforcement resources. Similarly, to
the extent that instruments currently not considered NMS securities can
be substitutes for long or short positions in NMS securities, having
access to an audit trail that documents trading activity in such
securities would improve the Commission's ability to make a risk
assessment as to information it has received about possibly
manipulative activity.\171\ Having ready access to this information in
an audit trail also would improve the Commission's inspection process
because it would enhance risk assessment and allow for better selection
as to which broker-dealers to examine. For example, the information
would allow for better trend analysis and outlier identification. It
also would improve pre-examination work and the asset verification
process,\172\ and focus document requests, making the examination
process more efficient for the Commission staff and the registrants
subject to the process.
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    \170\ 15 U.S.C. 78i(a) and 78j(b).
    \171\ The Commission's Division of Enforcement has recently
established an Office of Market Intelligence. This Office, among
other things, conducts intake and triage of investor and industry
referrals that are received by the Commission each year. Currently,
a thorough review of referrals requires extensive resource
allocation as the primary source for evaluating trading data in the
EBS system. Expansion of the consolidated audit trail to non-NMS
securities would allow that Office to evaluate the merits of each
referral faster and more effectively, and more efficiently allocate
enforcement resources to appropriate cases.
    \172\ Asset verification is an exam process that attempts to
locate independent information to verify certain customer positions,
transactions, and balances at broker-dealers.
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    To help ensure that such an expansion would occur in a reasonable
time and that the systems and technology that would be used to
implement the Rule as proposed are designed to be easily scalable,
proposed Rule 613(i) would require that the NMS plan contain a
provision requiring each national securities exchange and national
securities association that is a sponsor of the plan \173\ to jointly
provide the Commission a document outlining how the sponsors could
incorporate into the consolidated audit trail information with respect
to: (1) Equity securities that

are not NMS securities; (2) debt securities, including asset-backed
securities; and (3) primary market transactions in NMS stocks, equity
securities that are not NMS securities, and debt securities. The
sponsors specifically would be required to address, among other things,
details for each order and reportable event that they would recommend
requiring to be provided; which market participants would be required
to provide the data; an implementation timeline; and a cost estimate.
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    \173\ Sponsor, when used with respect to an NMS plan, is defined
in Rule 600(a)(70) of Regulation NMS to mean any self-regulatory
organization which is a signatory to such plan and has agreed to act
in accordance with the terms of the plan. See 17 CFR 242.600(a)(70).
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    The Commission requests comment on the proposed scope of products
to be covered by the consolidated audit trail. Should the consolidated
audit trail initially cover securities other than NMS securities? Why
or why not? The Commission also requests comment on whether the
approach to expand the consolidated audit trail to include the products
and transactions specified above represents an appropriate expansion of
the consolidated audit trail, and what additional capital commitment
would be required by the various market participants to implement such
an expansion. Please be specific in your response with respect to
different products or transactions (e.g. security-based swaps, or
primary market transactions in NMS stocks). Are there other securities
or products that should be identified and included in a future
expansion? What would be the challenges to any expansion to the
products and transactions listed above? Are there any other actions
that the Commission or SROs would need to take to be able to expand the
audit trail to certain products or transactions? Should the Commission
consider expansion to certain products or transactions before others?
The Commission also requests comment on an appropriate and realistic
time frame for including these other products and transactions in the
consolidated audit trail and whether an expansion should be done in
phases.
    The Commission also requests comment on whether implementation of
the proposed Rule, which would apply to NMS securities, would have an
impact on trading activity by market participants in products not
initially covered by the proposed Rule. The proposed consolidated audit
trail is designed to provide the SROs and the Commission a tool to more
effectively, and in a more timely manner, identify potential
manipulative or other illegal activity. More timely detection and
investigation of such activity may lead to greater deterrence of future
illegal activity if potential wrongdoers perceive a greater chance of
regulators identifying their activity in a more timely fashion. Do
commenters believe that the existence of the proposed audit trail would
alter market participants' trading behavior, such as by shifting their
trading to products or markets not covered by the proposed Rule to
avoid detection of illegal activity using consolidated audit trail
data? Would the proposal impact a market participant's analysis of the
potential risks and benefits of manipulative activity involving NMS
securities? If so, how so? In addition, to the extent commenters
believe that market participants may alter their trading behavior, such
as by shifting trading to products that are not initially covered by
the proposed Rule to avoid detection of manipulative activity, the
Commission requests comment on the importance of expanding the
consolidated audit trail to cover additional products.

B. Orders and Quotations

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

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

C. Persons Required To Provide Information to the Central Repository

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

    The Commission's intent is to require any entity acting in a broker
or dealer capacity that would receive an order from a customer or
originate an order for its own account to provide information to the
central repository. The Commission requests comment on whether
requiring all members of each exchange and association to provide the
required information would encompass all broker or dealers or other
persons that would receive or originate orders, as defined in the
proposed Rule. If not, why not? The Commission requests comment on
whether it should, in the alternative, require all brokers and dealers
registered with the Commission to provide such information, rather than
all members of an exchange or association. Would applying the
requirements to registered brokers and dealers encompass all persons
that would be able to receive or originate orders as defined in the
proposed rule? Are there persons that are not registered as a broker or
dealer, and that are not a member of an exchange or association, that
would still receive or originate orders in NMS securities? How should
the Commission address that situation to promote inclusion of all
relevant orders and executions in a consolidated audit trail?

D. Provision of Information to the Central Repository

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

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

    Specifically, the proposed Rule would require the NMS plan to
require each national securities exchange and its members to collect
and provide to the central repository certain order information for
each NMS security registered or listed for trading on such exchange or
admitted to unlisted trading privileges on such exchange.\183\ The
proposed Rule also would require the NMS plan to require each national
securities association and its members to collect and provide to the
central repository certain order information for each NMS security for
which transaction reports are required to be submitted to the
association.\184\ The Commission requests comment on whether requiring
exchanges and their members, and associations and their members, to
report information for orders for these securities to a central
repository is appropriate, and whether the requirements, as proposed,
would cover all NMS securities.\185\
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    \183\ See proposed Rule 613(c)(5).
    \184\ See proposed Rule 613(c)(6).
    \185\ See infra Section III.F. for a discussion of the central
repository.
---------------------------------------------------------------------------

    As discussed below in Section III.D.1., certain of the information
would be required to be captured and transmitted to the central
repository on a real time basis, meaning immediately and with no built
in delay from when the reportable event occurs.\186\ Other information
would be permitted to be captured and transmitted to the central
repository promptly after the exchange, association, or member receives
the information, but in no instance later than midnight of the day that
the reportable event occurs or the exchange, association, or member
receives such information.\187\ The data collected by the national
securities exchanges, national securities associations, and their
members would be required to be electronically transmitted to the
central repository in a uniform electronic format.\188\
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    \186\ See proposed Rule 613(c)(3). See supra note 179 for a
definition of reportable event.
    \187\ See proposed Rule 613(c)(4). This requirement to report no
later than midnight on the day that the reportable event occurs or
the exchange, association or member receives the information would
be determined using the local time of the entity reporting the
information to the central repository.
    \188\ See proposed Rule 613(c)(2).
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1. Information To Be Provided to the Central Repository in Real Time
    As discussed above in Section II.A.4., the Commission preliminarily
believes that requiring the submission of consolidated audit trail
information on a real time basis would help enable more timely cross-
market monitoring or surveillance and investigations of, or other
responses to, market anomalies. Regulators therefore could more easily
and quickly identify manipulative or other undesirable activity. Having
the information available in real time would allow the staff of the
SROs to run certain cross-market surveillances in real time to
ascertain whether anomalous trading activity is occurring, and the SROs
could then more quickly begin an investigation into the suspected
anomalous trading. Timely pursuit of potential violations can be
important in seeking to freeze any profits received from illegal
activity before they are spent or otherwise become unreachable (for
instance, by being transferred out of the country). The Commission also
preliminarily believes that requiring the submission of audit trail
information in real time would enable the Commission to access the
information on a more timely basis than currently is the case, to
support its examination and enforcement activities, as well as its
analysis of market activity.\189\
---------------------------------------------------------------------------

    \189\ See supra notes 28, 154, and 171 and accompanying text.
---------------------------------------------------------------------------

    The Commission requests comment as to whether it is feasible to
require the submission of the proposed audit trail information, as
detailed below, to the central repository on a real time basis. If the
information is not submitted on a real time basis, when should the
information be submitted to the central repository? Would real time
order and execution information be useful for cross-market surveillance
and investigations of market anomalies? If so, how? If not, why not?
Please discuss the costs and benefits of recording and transmitting the
data in real time, or not in real time. For example, how would costs
differ between submitting end-of-day data compared to real time data?
Are there categories of information that would be easier to produce on
a real time basis than others? What types of systems modifications by
the exchanges, FINRA, and their respective members would be necessary
to collect and submit the required audit trail information to the
central repository on a real time basis? Please respond with
specificity. The Commission further requests comment on whether the
requirement to report information in real time should be limited to a
specific time period during the day, such as when the markets for
trading NMS stocks and listed options are open for trading? Or some
other time period? How much lower would the cost be to submit data in
real time during trading hours than during the whole day? Or some other
time period? Are there practical issues with requiring real time
reporting throughout the day? Would requiring data to be submitted in
real time all day, as proposed, allow the ability to perform systems
maintenance if necessary? If commenters support the requirement to
report information in real time, do they believe that there are times
during the day when real time reporting may be unnecessary? Why or why
not?
    Proposed Rule 613(c)(3) would require the NMS plan to require each
exchange, association, and member to collect and provide to the central
repository on a real time basis details for each order and each
reportable event,\190\ as outlined below. Each exchange, association,
or member would be required to report the information for each order,
for each reportable event, only with respect to an action taken by the
exchange, association, or member. For example, if a member receives an
order from a customer, the member would be required to report the
receipt of that order (with the required information) to the central
repository. If the member then routed that order to an exchange for
execution, the member would be required to report the routing of that
order (with the required information) to the central repository.
Likewise, the exchange would be required to report the receipt of that
order from the member (with the required information) to the central
repository. If the exchange executed the order on its trading
system(s), the exchange would be required to report that execution of
the order (with the required information) to the central repository,
but the member would not also be required to report the execution of
the order to the central repository. If the member executed the order
in the over-the-counter market, however, rather than routing the order
to an exchange (or other market center) for execution, the member would
be required to report the execution of the order to the central
repository.
---------------------------------------------------------------------------

    \190\ See supra note 179 for a definition of reportable event.
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i. Customer Information
    The proposed Rule specifically would require, for the receipt or
origination of each order, information to be reported to the central
repository with respect to the customer that generates the order--
specifically, the beneficial owner(s) of the account originating the
order and the person exercising investment discretion for the account
originating the order, if different from the beneficial owner.\191\ As
discussed above in Section

II.A.1, such information generally is neither required nor captured on
existing audit trails. While Rule 17a-25 requires broker-dealers to
electronically submit information about customer and proprietary
securities trading, such information is required to be submitted to the
Commission only upon request. The Commission preliminarily believes
that the usefulness of audit trail information for purposes of
effective enforcement and cross-market surveillance of trading activity
would be greatly improved by having the identity of the customer
electronically attached to the report of the receipt or origination of
each order that is sent to the central repository.\192\
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    \191\ The proposed Rule would define ``customer'' to mean the
beneficial owner(s) of the account originating the order and the
person exercising investment discretion for the account originating
the order, if different from the beneficial owner(s). See proposed
Rule 613(j)(1). The Commission notes that this proposed definition
of customer is only for purposes of proposed Rule 613, and what
information would be required to be collected and disclosed by
members to the central repository. The Commission does not intend to
alter the responsibilities that broker-dealers are already subject
to pursuant to SRO rules, or the federal securities laws, rules or
regulations or other laws, with respect to the customers (for
example, suitability rules, see, e.g. NASD Rule 2310).
    \192\ See supra Section II.A.
---------------------------------------------------------------------------

    The proposed Rule would require that the NMS plan require, for the
receipt or origination of an order, the provision to the central
repository of information of sufficient detail to identify the
customer.\193\ The Commission preliminarily believes that the customer
name and address would be sufficient detail to identify the customer.
In addition, the proposed Rule would require the provision of customer
account information, which would be defined in proposed Rule 613(j)(2)
to include but not be limited to: (1) The account number; (2) account
type (e.g. options); (3) customer type (e.g., retail, mutual fund,
broker-dealer proprietary); (4) the date the account was opened; and
(5) the large trader identifier (if applicable).\194\ The Commission
preliminarily believes that information on the type of account and when
it was opened would be important to investigations of potential insider
trading. For example, knowing when in time the customer opened the
account in relation to the suspicious trading activity, or whether the
customer changed account authorization to permit options trading just
before suspicious options trading, could be evidence of intent. The
Commission notes that currently any member receiving orders from a
customer would be required, as part of its compliance with its books
and records requirements,\195\ to take reasonable and appropriate steps
to ensure the accuracy of the customer information received. This
should not change, if this proposal were adopted, with respect to
customer information recorded and provided to the central repository.
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    \193\ See proposed Rule 613(c)(7)(i)(A).
    \194\ See proposed Rule 613(c)(7)(i)(C). See also Large Trader
Proposal, supra note 11.
    \195\ See, e.g., Rules 17a-3, 17a-4, and 17a-25 under the
Exchange Act, 17 CFR 240.17a-3, 17a-4, and 17a-25.
---------------------------------------------------------------------------

    The proposed Rule also would require a unique customer identifier
for each customer.\196\ The unique customer identifier should remain
constant for each customer, and have the same format, across all
broker-dealers. This unique customer identifier would serve a similar
purpose to a customer's social security number or tax identification
number, obviating the need to include that information in the
consolidated audit trail data. The Commission is not proposing to
mandate the method for achieving this requirement, so as to allow those
entities subject to the proposed Rule flexibility to determine the most
practical way to accomplish the requirement of having unique customer
identifiers. However, one alternative could be to have the central
repository be responsible for assigning a unique customer identifier in
response to an input by a member of a customer's social security number
or tax identification number. If the customer already has been assigned
a unique identifier because of a prior request by another member, the
central repository would provide to the member that same identifier. If
no unique identifier has previously been assigned, the central
repository could assign a new one. Access to this part of the central
repository's functionality could be more tightly controlled than access
to the consolidated audit trail data, to help ensure the
confidentiality of the social security or tax identification numbers.
---------------------------------------------------------------------------

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

    The Commission requests comment as to whether each item of
information regarding the customer is necessary for an effective
consolidated audit trail. Is there any additional data that should be
included to help identify the customer submitting the order? The
Commission also requests comment on the proposed definition of
customer. For example, should the definition only include the person
exercising investment discretion? Should the definition include the
beneficial owner? Should the customer information requirement also
include a unique identifier for the particular computer algorithm used
by the firm to generate the order, if applicable? Is there a better way
to identify in the audit trail individual algorithmically-generated
trading strategies? Should each trading desk at a member be required to
have its own unique customer identifier, to the extent the trading desk
is originating orders for the account of the member? This information
on specific algorithms or trading desks could be useful to focus an
inspection or investigation, if regulators could tell from the audit
trail data that there was a pattern of suspicious trading activity from
a specific algorithm or desk.
    The Commission requests comment as to what systems modifications,
if any, would be required for members to collect and to provide this
customer identification information to the central repository. Do
broker-dealers currently keep this information electronically? If not,
what changes would need to be made to collect and provide this
information for existing accounts to the central repository? What would
be the cost of converting this information into an electronic,
accessible and linked format? Please be specific in your response.
Further, the Commission requests comment on whether there are laws or
other regulations in non-U.S. jurisdictions that would limit or
prohibit a member from obtaining the proposed customer information for
non-U.S. customers. If so, what are they? How do members currently
obtain such information for such customers? If there are special
difficulties in obtaining customer information from non-US
jurisdictions, how should the consolidated audit trail be modified or
otherwise reflect that difficulty?
    The Commission requests comment on other possible ways to develop
and implement unique customer identifiers. For example, who should be
responsible for generating the identifier? The Commission also requests
comment on whether a unique customer identifier, together with the
other information with respect to the customer that would be required
to be provided under the proposed Rule, is sufficient to identify
individual customers. Are there any concerns about how the customer
information will be protected? If so, what steps should be taken to
ensure appropriate safeguards with respect to the submission of
customer information, as well as the receipt, consolidation, and
maintenance of such information in the central repository.
    In addition, the Commission requests comment on whether the
requirement to provide customer information to the central repository
in real time would impact market participants' trading activity? If so,
how so? For example, would market participants be hesitant to

engage in certain legal trading activity because of a concern about
providing customer information in real time? Would market participants
shift their trading activity to products or markets that do not require
the capture of customer information to avoid compliance with this
requirement of the proposed Rule? If so, how should the Commission
address those concerns? On the other hand, would enhanced surveillance
of the markets as a result of the consolidated audit trail attract
additional trading volume to the U.S. markets?
ii. National Securities Exchange, National Securities Association and
Broker-Dealer Identifier Information
    Each member originating or receiving an order from a customer, and
each national securities exchange, national securities association, and
member that subsequently handles the order, would be required to
include its own unique identifier in each report it sends to the
central repository for a reportable event. Such an identifier would
allow the Commission and SRO staff to determine which member
facilitated the transaction and assist in assessing compliance with
various SRO or Commission rules, such as the limit order display rule
(Rule 604 of Regulation NMS).\197\ This is especially important for
ensuring that individual customer orders are handled and executed in
accordance with SRO and Commission rules. In addition, routing
decisions are an important aspect in assessing order execution quality
and compliance with a member's duty of best execution. Further, if
applicable, the member receiving an order from a customer would be
required to report an identifier specifying the branch office and the
registered representative at the member receiving the order. These
identifiers would be unique to the exchange, association, member,
branch office, and registered representative.
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    \197\ 17 CFR 242.604.
---------------------------------------------------------------------------

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

precision in the timing of events? How would your answer be impacted by
the extent to which market participants' clocks are synchronized?
Alternatively, do commenters believe that it would be more appropriate
to require in the proposed Rule that the time of reporting be
consistent with industry standards, rather than including a specific
time standard (recognizing that the SROs could choose to include a
specific time standard in the NMS plan)?
    An open/close indicator currently is required to be submitted to
exchanges for listed option orders \202\ and indicates whether the
trade is opening a new position or increasing an existing position
rather than closing or decreasing an existing position. The open/close
indicator provides information to more easily track the size and
holding time for individual positions, and thus to more easily track
open interest and short interest. In addition, an open/close indicator
could be used to indicate when a buy order in a stock is a buy to cover
on a short sale. This information is useful in investigating short
selling abuses and short squeezes. For example, a build up of a large
short position by one investor along with the spreading of rumors may
be indicative of using short selling as a tool to potentially
manipulate prices. Information on when the position decreases is also
useful for indicating potential manipulation, insider trading, or other
rule violations. Information on whether the account has a prior
position in the security is useful in a number of investigations. For
example, the ability to easily determine whether an order adds to a
position, along with the timing of the order, is particularly important
in detecting and investigating portfolio pumping or marking the close.
Also, information on whether the account has a prior position may be
important in investigating ``layering'' or ``spoofing.'' Layering and
spoofing are manipulations where orders are placed close to the best
buy or sell price with no intention to trade in an effort to falsely
overstate the liquidity in a security.
---------------------------------------------------------------------------

    \202\ See, e.g., CBOE Rule 6.51; BATS Rule 20.7; and ISE Rule
1404.
---------------------------------------------------------------------------

    The Commission intends that the items of information required to be
reported to the central repository for the receipt or origination of an
order, at a minimum, include substantially all of the information
currently required to be reported, or provided upon request, under the
exchanges' and FINRA's existing order audit trail rules, as well as the
EBS system rules and Rule 17a-25 under the Exchange Act. The Commission
requests comment as to whether there are any items of information that
are required to be recorded and reported by existing audit trail rules,
or to be provided to the SROs or Commission upon request, that are not
included within the proposed Rule that commenters believe should be
included. If there are, please identify each item of information and
discuss why you believe that such information should be included in the
proposed consolidated audit trail. The Commission also requests comment
on whether there are items of information included in the current SRO
audit trails, and which are proposed to be included in the consolidated
audit trail, that are unnecessary for surveillance, investigative or
other regulatory purposes. If so, what are these data elements and why
are they not necessary as part of a consolidated audit trail? Are they
relevant for other purposes? The Commission further requests comment on
whether it should require, as part of the disclosure of special
handling instructions, the disclosure of an individual algorithm that
may be used by a member or customer to originate or execute an order,
and if so, how such an algorithm should be identified.
    As noted above, members currently are required to indicate whether
an order would open or close a position for listed options.\203\ The
Commission requests comment as to what extent members currently obtain
or have access to this information from their customers, or track this
information for their own proprietary orders, for all NMS securities.
If members currently do obtain this information, is the information
collected and stored electronically? If members currently do not have
access to or obtain this information for customer orders, what would be
the impact of the proposed requirement to collect and provide this
information to the central repository? What would be the costs, if any,
of collecting and providing this information? Please explain and
quantify any potential impact or costs.
---------------------------------------------------------------------------

    \203\ Id.
---------------------------------------------------------------------------

    The proposed Rule does not specify exact order types (e.g., market,
limit, stop, pegged, stop limit) to be included as material terms of an
order because order types may differ across markets, and even an order
type with the same title may have a different meaning from one exchange
to another. Further, markets are frequently creating new order types
and eliminating existing order types. In addition, the Commission notes
that it may be difficult to distinguish between an ``order type'' and a
special handling instruction, such as ``do not display.'' The
Commission therefore preliminarily believes that it would not be
practical to include in the proposed Rule a list of order types in the
required information to be reported to the central repository. The
Commission notes, however, that the SROs may choose to include more
detail in the NMS plan. The Commission requests comment on this
approach. The Commission also requests comment as to whether there are
other items of information that would be required to be reported to the
central repository that have, or may have, different meanings across
different exchanges. If so, what are they? How should these differences
be addressed in the proposed Rule?
    The proposed Rule also would require the NMS plan to require each
member of an exchange or FINRA to ``tag'' each order received or
originated by the member with a unique order identifier that would be
reported to the central repository and that would stay with that order
throughout its life, including routing, modification, execution, and
cancellation.\204\ The members, exchanges, and FINRA would be required
to pass along the unique order identifier with the order when routing
the order, and the unique order identifier would be required on each
reportable event report. For example, Member ABC that receives an order
from a customer would immediately assign it a unique order identifier,
and would report that identifier to the central repository along with
the rest of the required information. If Member ABC subsequently routed
the order to another member, Member DEF, Member ABC would be required
to pass along to Member DEF the unique order identifier, as well as to
attach the unique order identifier when reporting the routing of the
order to the central repository. If Member DEF routed the order to
Exchange A for execution, Member DEF would pass along to Exchange A
with the order the unique order identifier, and would attach the
identifier on the report of the route sent to the central repository.
Exchange A would be required to attach the unique order identifier when
reporting receipt of the order, and an execution of the order (if
applicable) to the central repository.
---------------------------------------------------------------------------

    \204\ See proposed Rule 613(c)(7)(i)(D).
---------------------------------------------------------------------------

    The Commission recognizes that the reality of how orders are routed
and executed often is complex, and that it likely is not feasible to
anticipate how the proposed requirement for a unique

order identifier would or would not apply to each different factual
scenario. For example, members may often execute customer orders on a
``riskless principal'' basis,\205\ rather than on an agency basis. The
Commission preliminarily believes that it would not be practical or
feasible to ``link'' through related unique order identifiers the
customer order(s) and the member's proprietary order(s) from which the
customer order is given an allocation. Rather, the Commission envisions
that the member would create a new unique order identifier for each
proprietary order, and that the manner in which the execution of the
customer order would be ``linked'' with one (or more) proprietary
order(s) (if at all) would be through the inclusion of the unique order
identifier for the contra-side order(s) on the report of the execution
of the customer order sent to the central repository.\206\ However, in
a situation where a member merely broke up a larger customer order into
smaller orders and sent those orders, on an agency basis, to multiple
markets for execution, the Commission preliminarily believes that the
unique order identifier of the original customer order should carry
through in some manner to the individual smaller orders that result
when the original order is broken up. For example, it may be necessary
to attach two unique order identifiers to an order--the original order
identifier (i.e. parent order) and the individual smaller order
identifier (i.e. child order). Alternatively, the unique order
identifier of the parent order could be modified to carry through to
the child orders (for example, the parent order could have an
identifier ABC and the child orders could have identifiers of ABC1 and
ABC2).
---------------------------------------------------------------------------

    \205\ For example, a member receives a customer order, and
rather than sending the customer order as an agency order to an
exchange or other marketplace to execute, the member creates an
order for its proprietary account that it sends to an exchange or
other marketplace to be executed. Once an execution occurs in the
proprietary account, the member would then execute the customer
order against its proprietary account. This process can be
complicated by the member receiving and handling more than one
customer order at a time, and creating one or more proprietary
orders to send to one or more markets, and the manner in which the
member allocates executions from its proprietary account among the
customer orders.
    \206\ See proposed Rule 613(c)(7)(vi)(C).
---------------------------------------------------------------------------

    The Commission preliminarily believes that a unique order
identifier that is essentially transferred along with an order from
origination through execution or cancellation is useful for a
consolidated audit trail. The use of such an identifier would allow the
SROs and the Commission to efficiently link all events in the life of
an order and help create a complete audit trail across markets and
broker-dealers that handle the order. In this manner, being able to
link the parent order with the child orders through the unique order
identifiers would allow for ease of tracking of the original parent
order throughout its life. While the Commission believes that a unique
order identifier is an important data element for the consolidated
audit trail, the Commission is not proposing at this time to mandate
the format of such an identifier or how the identifier would be
generated.
    The Commission requests comment on whether, and why, a unique order
identifier that would stay with the order for the life of the order is
useful or essential for an effective consolidated audit trail. In
addition, the Commission requests comment on whether there is an
alternative to a unique order identifier that would stay with the order
for the life of the order. For example, would permitting each member or
SRO that receives an order from another member or SRO to attach its own
unique identifier to an order allow the SROs to efficiently link all
events in the life an order and ensure the creation of a complete audit
trail across each market and broker-dealer that handled the order? The
Commission requests comment on the feasibility and merits of the manner
in which it proposes unique order identifiers be handled for riskless
principal transactions. The Commission also requests comment on the
feasibility and merits of requiring that a unique order identifier be
attached to an order, as well as the multiple orders that may result if
the original order is subsequently broken up into several orders, in a
manner that would permit regulators to trace the subsequent orders back
to the original single order. The Commission also requests comment on
the feasibility and merits of requiring that a unique order identifier
be attached to an order that is the result of a combination of two more
orders in a manner that would permit regulators to trace the combined
order back to its component orders. The Commission further requests
comment as to how unique order identifiers could be generated for both
electronic and manual orders, and who should be responsible for
generating them. Given the significant number of orders (including
quotations) for which information would be required to be collected and
provided to the central repository pursuant to the proposed Rule, the
Commission requests comment on the feasibility of allowing unique order
identifiers to be re-used. If unique order identifiers were to be re-
used, at what point should that be allowed? Are there any concerns with
re-use that should be addressed? Additionally, the Commission requests
comment on whether it is feasible to require unique order identifiers
if the consolidated audit trail is implemented in the proposed phased
approach? For example, is it appropriate to require that national
securities exchanges and national securities associations comply with
this requirement before their members are required to do so?
    The Commission also requests comment on procedures or safeguards
market participants may wish to establish to ensure that unique order
identifiers are routed and reported accurately. Further, the Commission
requests comment on what systems modifications, if any, would be
required in order to ``tag'' every order with a unique order
identifier. Please respond to each question with specificity.
iv. Routing
    The proposed Rule would require that the NMS plan require the
collection and reporting to the central repository of all material
information related to the routing of an order. Specifically, the
proposed Rule would require the reporting of the following information
each time an order is routed by the member or SRO that is doing the
routing: (1) The unique order identifier; (2) the date on which an
order was routed; (3) the exact time (in milliseconds) the order was
routed; (4) the unique identifier of the broker-dealer or national
securities exchange that routes the order; (5) the unique identifier of
the broker-dealer or national securities exchange that receives the
order; (6) the identity and nature of the department or desk to which
an order is routed if a broker-dealer routes the order internally;
\207\ and (7) the material terms of the order.\208\
---------------------------------------------------------------------------

    \207\ Internal routing information can be a critical element in
assessing whether a member may be disadvantaging customer orders,
either by trading ahead of customer orders, or by executing orders
as principal at prices inferior to the NBBO.
    \208\ See proposed Rule 613(c)(7)(ii).
---------------------------------------------------------------------------

    Further, the proposed Rule would require the collection and
reporting by the SRO or member receiving an order of the following
information each time a routed order is received: (1) The unique order
identifier; (2) the date on which the order is received; (3) the time
at which the order is received (in milliseconds); (4) the unique
identifier of the broker-dealer or national securities exchange
receiving the order; (5) the unique identifier of the broker-

dealer or national securities exchange routing the order; and (6) the
material terms of the order.\209\
---------------------------------------------------------------------------

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

    This information would allow regulatory staff to easily identify
each member or exchange that ``touches'' the order during its life, as
well as the dates and times at which each member or exchange receives
and reroutes the order, and any changes that may be made to the
original terms of the order along the way. The Commission preliminarily
believes that this information for orders that are routed would allow
the Commission and SROs to efficiently track an order from inception
through cancellation or execution.
    The Commission requests comment as to whether such information
regarding the routing of orders is useful or necessary for an effective
consolidated audit trail. Should any additional information be included
in the consolidated audit trail relating to routing? The Commission
requests comment as to what systems modifications, if any, would be
required to provide this information. Do members currently have, or
have access to, this information? If not, what changes would need to be
made to collect this information for existing accounts for submission
to the central repository? Do commenters believe that it would be
necessary to achieve the purposes of the proposed Rule to require
information from each member or SRO that ``touches'' an order? Please
explain with specificity why or why not. Is it feasible to require
information relating to the routing of orders if the consolidated audit
trail is implemented in the proposed phased approach? For example, is
it appropriate to require that national securities exchanges and
national securities associations comply with this requirement before
their members are required to do so?
v. Modification, Cancellation, and Execution
    The proposed Rule would require the NMS plan to require that
information be reported to the central repository concerning any
modifications to the material terms of an order or partial or full
order cancellations. The national securities exchange, national
securities association, or member handling the order at the time would
be required to immediately report to the central repository the
following information: (1) The unique order identifier, (2) the date
and time (in milliseconds) that an order modification or cancellation
was originated or received; (3) the identity of the person responsible
for the modification or cancellation instruction; (4) the price and
remaining size of the order, if modified; and (5) other modifications
to the material terms of the order.\210\ Information pertaining to
order modifications and cancellations would assist the Commission and
SROs in identifying all changes made to an order and the persons and
broker-dealers responsible for the changes.
---------------------------------------------------------------------------

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

    The proposed Rule also would require the following information on
full or partial executions of orders to be collected and reported to
the central repository: (1) The unique order identifier; (2) the
execution date; (3) the time of execution (in milliseconds); (4) the
capacity of the entity executing the order (whether principal, agency,
or riskless principal); (5) the execution price; (6) the size of the
execution; (7) the unique identifier of the national securities
exchange or broker-dealer executing the order; \211\ and (8) whether
the execution was reported pursuant to an effective transaction
reporting plan or pursuant to the OPRA Plan, and the time of such
report.\212\
---------------------------------------------------------------------------

    \211\ Each national securities exchange and national securities
association would have its own unique identifier, as well as each
broker-dealer (member) (see supra Section III.D.1.ii.).
    \212\ See proposed Rule 613(c)(7)(v).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the required execution
information, in combination with the proposed information pertaining to
order receipt or origination, modification, or cancellation, would
provide regulators with a comprehensive, near real time view of all
stages and all participants in the life of an order. The proposed Rule
would allow the Commission and SROs to identify, for a particular
transaction, every member and national securities exchange involved in
the receipt or origination, routing, modification, and execution (or
cancellation) of the order. This order information, including the
readily accessible customer information, should help regulators
investigate suspicious trading activity in a more timely manner than
currently possible.
    Additionally, the requirement to report whether and when the
execution of the order was reported to the consolidated tape \213\
should allow regulators to more efficiently evaluate certain trading
activity. For example, trading patterns of reported and unreported
transactions may cause the staff of an SRO or the Commission to make
further inquiry into the nature of the trading to determine whether the
public was receiving accurate and timely information regarding
executions and that market participants were continuing to comply with
the trade reporting obligations under SRO rules. Similarly, patterns of
reported and unreported transactions could be indicia of market abuse,
including failure to obtain best execution for customer orders or
possible market manipulation. Being able to more efficiently compare
the consolidated order execution data with the trades reported to the
consolidated tape could thus be an important component of overall
surveillance activity.
---------------------------------------------------------------------------

    \213\ Id. See also infra Section III.F.1. for a discussion of
the requirement in proposed Rule 613(e)(5) that the NMS plan require
the central repository to receive and retain on a current and
continuing basis (i) the national best bid and national best offer
for each NMS security, (ii) transaction reports reported pursuant to
a transaction reporting plan filed with the Commission pursuant to,
and meeting the requirements of, Rule 601 of Regulation NMS, and
(iii) last sale reports reported pursuant to the OPRA Plan.
---------------------------------------------------------------------------

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

the central repository.\215\ Is this practical? Is there another method
by which to link the execution of the customer order to the proprietary
orders? Is it necessary to do so to achieve the purposes of the
consolidated audit trail?
---------------------------------------------------------------------------

    \214\ See supra notes 205-206 and accompanying text.
    \215\ See supra note 206 and accompanying text.
---------------------------------------------------------------------------

    The Commission requests comment on whether the information proposed
to be collected and reported would be sufficient to create a complete
and accurate audit trail. Is there additional information that should
be collected and reported? If yes, please describe the information and
the value its collection and reporting would add to the consolidated
audit trail.
2. Information To Be Collected Other Than in Real Time
    While the majority of order and execution information would be
required to be transmitted to the central repository on a real time
basis, the Commission recognizes that this may not be practical or
feasible for all information because the information may not be known
at the time of the reportable event.\216\ Thus, the Commission is
proposing that certain information be transmitted to the central
repository promptly after the national securities exchange, national
securities association, or member receives the information, but in no
instance later than midnight of the day that the reportable event
occurs or the national securities exchange, national securities
association, or member receives such information.\217\ The Commission
preliminarily believes that this proposed time frame would provide
sufficient time for an exchange, association, or a member to obtain the
information required to be reported while still allowing regulators to
access the information for regulatory purposes on a more timely basis
than today.
---------------------------------------------------------------------------

    \216\ For example, a member may receive an order during the day
from an advisory customer but not know to which sub-accounts to
allocate execution of the order until later in the day.
    \217\ See proposed Rule 613(c)(4).
---------------------------------------------------------------------------

    Each national securities exchange, national securities association
and their members would be required to report the account number for
any subaccounts to which an execution is allocated.\218\ By requiring
that this data be included in the consolidated audit trail, regulators
would be able to more easily identify the ``ultimate'' customer for the
trade. The Commission preliminarily believes that it would be useful to
know the account number as well as the required information on the
beneficial owner. For example, a person or groups of persons could
trade through a single account or numerous accounts. Because individual
traders may use multiple accounts at multiple broker-dealers, being
able to identify the beneficial owner of the underlying accounts aids
in the identification and investigation of suspicious trading activity.
Similarly, traders may seek to hide manipulative activity from
regulatory oversight by trading anonymously through omnibus accounts.
In those instances, linking the trade to the individual trader requires
the market center to be able to identify both the accounts trading and
the beneficial owner or owners of those accounts to determine what
person or group of persons is directing the specific trades at issue.
Requiring the identity of the ultimate customer electronically to be
attached to each order would make this information easily accessible
and searchable and thus would greatly improve the usefulness of audit
trail information for purposes of effective enforcement and cross-
market surveillance.
---------------------------------------------------------------------------

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

    Each national securities exchange, national securities association
and their members also would be required to report the unique
identifier of the clearing broker or prime broker for the transaction,
if applicable, and the unique order identifier of any contra-side
order.\219\ Finally, if the execution is cancelled, a cancelled trade
indicator would be required to be reported. In addition, the proposed
Rule also would require the reporting of any special settlement terms
for the execution, if applicable; short sale borrower information and
identifier; and the amount of a commission, if any, paid by the
customer, and the unique identifier of the broker-dealer(s) to whom the
commission is paid.\220\
---------------------------------------------------------------------------

    \219\ See proposed Rule 613(c)(7)(vi)(B) and (C).
    \220\ See proposed Rule 613(c)(7)(vi)(D), (E), and (F).
---------------------------------------------------------------------------

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

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

E. Clock Synchronization

    The Commission believes that clock synchronization is necessary to
ensure an accurate audit trail, given the number of market participants
with internal order handling and trading systems that would be
reporting information to the central repository. Therefore, proposed
Rule 613(d) would provide that the NMS plan filed with the Commission
include a requirement that each national securities exchange and
national securities association, and their members, synchronize their
business clocks that are used for the purposes of recording the date
and time of any event that must be reported under the proposed Rule.
The proposed Rule would require each exchange, FINRA, and their members
to synchronize their clocks to the time maintained by the National
Institute of Standards and Technology (``NIST''), consistent with
industry standards.\226\ Exchanges, associations, and the members would
be required to synchronize their business clocks in accordance with
these requirements within four months after effectiveness of the NMS
plan.\227\
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    \226\ See proposed Rule 613(d)(1).
    \227\ See proposed Rule 613(a)(3)(ii).
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    The Commission is not proposing to set a standard within which the
clocks must be synchronized to the NIST (e.g., to within one second of
the NIST clock), in recognition of how quickly technology can improve
and increase the speed at which orders are handled and executed.
Rather, the Commission is proposing that the clocks be synchronized
``consistent with industry standards.'' The exchanges and FINRA would
be able, however, to set a limit in the NMS plan to be filed with the
Commission. Also, in recognition of the pace at which technology
improves, the proposed Rule provides that the NMS plan shall require
each national securities exchange, national securities association, and
its respective members to annually evaluate the actual synchronization
standard adopted to consider whether it should be shortened, consistent
with changes in industry standards.\228\ When engaging in this annual
evaluation, exchanges, associations, and members could take into
account the feasibility of shortening the time standard, and whether
shortening the standard would allow for the conveyance of additional
meaningful information to the consolidated audit trail.
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    \228\ See proposed Rule 613(d)(2).
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    The Commission requests comment on whether this approach is
practical and would provide for sufficient flexibility in determining
how closely to synchronize clocks. Is the proposed Rule's requirement
that each exchange, association, and member synchronize its clocks in
accordance with the time maintained by NIST reasonable? To what extent
do SROs and their members currently synchronize clocks? Please answer
with specificity. Would synchronization as proposed require significant
systems modifications on behalf of national securities exchanges,
national securities association, or their respective members? Is it
reasonable to require clocks to be synchronized with the time
maintained by NIST within a time frame that is ``consistent with
industry standards''? Is there another standard that should be used by
the Commission? The Commission also requests comment on the feasibility
of requiring the exchanges, FINRA, and their members to comply with
these requirements within four months of effectiveness of the NMS plan.

F. Central Repository

    The proposed Rule would require that the NMS plan provide for the
creation and maintenance of a central repository, which would be a
facility of each exchange and FINRA.\229\ The central repository would
be jointly owned and operated by the exchanges and FINRA, and the NMS
plan would be required to provide, without limitation, the Commission
and SROs with access to, and use of, the data reported to and
consolidated by the central repository for the purpose of performing
their respective regulatory and oversight responsibilities pursuant to
the federal securities laws, rules, and regulations. Each of the
exchanges and FINRA would be a sponsor of the plan,\230\ and as such
would be responsible for selecting a plan processor to operate the
central repository.\231\
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    \229\ See proposed Rule 613(e)(1).
    \230\ See supra note 173 for a definition of a plan sponsor in
Rule 600(a)(70) of Regulation NMS, 17 CFR 242.600(a)(70).
    \231\ See infra Section III.I. for a definition and discussion
of the plan processor.
---------------------------------------------------------------------------

    The Commission requests comment on the need for a central
repository to receive and retain the consolidated audit trail
information. Are there alternatives to creating a central repository
for the receipt of order audit trail information? The Commission also
requests comment on whether it is practical or appropriate to require
the exchanges and FINRA to jointly own and operate the central
repository.

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

    \234\ See Rule 611 of Regulation NMS, 17 CFR 242.611. See also
ISE Rule 1901, NYSE Arca 6.94, and Phlx Rule 1084.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that requiring the
central repository to collect and retain in its database the
transaction information in a format compatible with the order execution
information would aid in monitoring for certain market manipulations.
As discussed above, the proposed Rule would require that each report of
the execution (in whole or in part) of an order sent to the central
repository include a notation as to whether the execution was reported
to the consolidated tape pursuant to an effective transaction reporting
plan or the OPRA Plan.\235\ This requirement should allow regulators to
more efficiently evaluate certain trading activity. For example,
trading patterns of reported and unreported trades may cause the staff
of an SRO to make further inquiry into the nature of the trading to
determine whether the public was receiving accurate and timely
information regarding executions and that market participants were
continuing to comply with the trade reporting obligations under SRO
rules. Similarly, patterns of reported and unreported transactions
could be indicia of market abuse, including failure to obtain best
execution for customer orders or possible market manipulation. Being
able to more efficiently compare the consolidated order execution data
with the trades reported to the consolidated tape could thus be an
important component of overall surveillance activity.
---------------------------------------------------------------------------

    \235\ See supra Section III.D.1.v.
---------------------------------------------------------------------------

    The Commission requests comment on the usefulness or necessity of
requiring the central repository to collect and retain in a format
compatible with the order audit trail information the NBBO and
transaction report information to help achieve the stated objectives of
the consolidated audit trail. Do commenters believe that it is
important for achieving the purposes of the consolidated audit trail?
If so, why? If not, why not? What are the advantages and disadvantages
of maintaining transaction information separately from order and
execution data included in the consolidated audit trail? Should the
transaction information be included in the consolidated audit trail
report? The Commission requests comment on whether the requirement that
the transaction and NBBO information be maintained in a format
compatible with the order information is practical. Would this
requirement achieve the goal of helping SRO and Commission staff
conducts searches and run surveillances across databases?
    The Commission has recently required that issuers report certain
data in interactive data format such as XBRL.\236\ This proposal does
not specify any particular or required data format, but allows the SROs
to select a data format. Should the Commission require that the data be
transmitted or stored in any particular format? What are the relative
merits of flat data files, relational data files, and interactive data
files? What other formats should be considered? In what format can the
SROs and their members efficiently transmit data? In what format would
the data required in the proposal be most easily accessed?
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    \236\ See Securities Act Release No. 9002 (January 30, 2009), 74
FR 6776 (February 10, 2009) (Interactive Data to Improve Financial
Reporting adopting release) (File No. S7-11-08).
---------------------------------------------------------------------------

    The proposed Rule would require the NMS plan to require the central
repository to retain the information collected pursuant to subparagraph
(c)(7) and (e)(5) of the proposed Rule in a convenient and usable
standard electronic data format that is directly available and
searchable electronically without any manual intervention for a period
of not less than five years. The information would be required to be
available immediately, or if immediate availability could not
reasonably and practically be achieved, any search query would be
required to begin operating on the data not later than one hour after
the search query is made.\237\
---------------------------------------------------------------------------

    \237\ See proposed Rule 613(e)(6).
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    The Commission preliminarily believes that the information (or the
results of a query searching the information) should generally be
available immediately. However, the Commission recognizes that the
results of an electronic search query may not be immediately available
because, for instance, the system must check an extremely large number
of records to answer the query or the system may need to retrieve
records from electronically archived data. In the case of archived
data, the Commission preliminarily proposes requiring that the search
query would need to begin operating on the data not later than one hour
after the query is made. The Commission requests comment as to whether
one hour would be reasonable amount of time to allow for accessing
archived data. Under current technological limitations, how long should
it take to access, in an electronic query with no manual intervention,
archived data of the type to be held by

the central repository? The Commission also requests comment on whether
it should mandate a time standard, such as one hour, in the proposed
Rule. Further, the Commission requests comment on whether the central
repository should be required to retain this information for longer or
shorter than five years. The Commission also requests comment on the
cost impact of these proposed record retention requirements. For
example, could comparable functionality be obtained at lower cost with
a different standard (for example, what would be the cost comparison
for one hour versus two hours)?
2. Access to Central Repository and Consolidated Audit Trail
Information and Confidentiality of Consolidated Audit Trail Information
    Each national securities exchange and national securities
association, as well as the Commission, would have access to the
central repository for purposes of performing its respective regulatory
and oversight responsibilities pursuant to the federal securities laws,
rules, and regulations. Such access would include access to all systems
of the central repository, and access to and use of the data reported
to and consolidated by the central repository.\238\ The proposed Rule
also would require that the NMS plan provide that such access to and
use of such data by each exchange, association, and the Commission for
the purpose of performing its regulatory and oversight responsibilities
pursuant to the federal securities laws, rules, and regulations shall
not be limited.\239\ In addition, the proposed Rule would require that
the NMS plan include a provision requiring the creation and maintenance
by the central repository of a method of access to the consolidated
data.\240\ This method of access would be required to be designed to
include search and reporting functions to optimize the use of the
consolidated data.
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    \238\ See proposed Rule 613(e)(2).
    \239\ Id.
    \240\ See proposed Rule 613(e)(3).
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    The Commission's access to the central repository, and access to
and use of the data maintained by the central repository, for purposes
of performing the Commission's responsibilities under the federal
securities laws, rules, and regulations could not be limited in any
way.\241\ The Commission requests comment as to whether the proposed
Rule as proposed would accomplish this objective? If not, why not? If
not, please provide comment as to an alternative or additional way to
accomplish this objective. The Commission also requests comment on the
advantages or disadvantages of Commission ownership or co-ownership of
the data maintained by the central repository.
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    \241\ As noted above, the central repository would be a facility
of each exchange and FINRA (see supra note 229 and accompanying
text), and as such, subject to the Commission's recordkeeping and
inspection authority. See, e.g., Section 17 of the Exchange Act, 17
U.S.C. 78q. Further, any amendment to the NMS plan would be filed
with the Commission pursuant to Rule 608 of Regulation NMS, and
would not become effective unless approved by the Commission or
otherwise as permitted in accordance with the requirements of Rule
608. See proposed Rule 613(a)(5), and Rule 608(a) and (b) of
Regulation NMS, 17 CFR 242.608(a) and (b).
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    As discussed above, the proposed Rule would require the reporting
of customer information, as well as information about ``live'' orders,
to the central repository on a real time basis. The Commission
recognizes the sensitivity of this information, and believes that
maintaining the confidentiality of, and limiting the use of, the data
is essential. Without such protections, broker-dealers and the
investing public could be at risk for security breaches that would
potentially have a detrimental impact on their financial condition, as
well as their trading activity and the markets. The consolidated data
also would include information about members' trading activities on
competitors' markets. The Commission therefore is proposing several
requirements designed to limit access to, and help assure
confidentiality and proper use of, the information.
    As noted above, the proposed Rule would limit the use of the
consolidated data by the SROs for purposes of performing their
respective regulatory and oversight responsibilities pursuant to the
federal securities laws, rules, and regulations.\242\ This proposed
restriction would not prevent any SRO from using the data that it
individually collects and provides to the central repository pursuant
to the proposed Rule for other purposes as permitted by applicable law,
rule or regulation.
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    \242\ See proposed Rules 613(e)(2). See also proposed Rule
613(e)(4)(i) (requiring in part that the NMS plan include a
provision requiring all plan sponsors and their employees to agree
not to use the consolidated data for any purpose other than
surveillance and regulatory purposes).
---------------------------------------------------------------------------

    The Commission requests comment as to whether access to the
consolidated audit trail information should be limited to the SROs and
the Commission, or whether there should be other access allowed. For
example, should SROs or the central repository be allowed to make the
data available to third parties, such as for academic research? If so,
should the data be permitted to be sold to help offset costs? By SROs?
By the central repository? If so, should there be set parameters? If
the data were made available to third parties, what protections should
be put in place to ensure the confidentiality of the data? Are there
particular data elements that are more sensitive and should not be sold
to help ensure the privacy of any individual and proprietary
information? Are there particular data elements that would pose fewer
concerns if released on a significant time lag? How long would such a
time lag need to be? What other concerns might arise from the use of
the data for non-regulatory purposes? Would use of the data provide
certain market participants with undue information advantages over
other market participants, increasing informational asymmetry in the
markets? Would the provision of market data to third parties affect the
willingness of market participants to trade in the U.S. markets? On the
other hand, would enhanced surveillance of the markets as a result of
the consolidated audit trail attract additional trading volume to the
U.S. markets? What would be the implications, if any, under the
financial privacy provisions of the Gramm-Leach-Bliley Act? \243\ The
Commission also requests comment as to whether, and to what extent,
other regulators, such as the Commodity Futures Trading Commission,
should have access to the data? For instance, to what extent do
commenters believe it would be beneficial for the Commission to work
with other regulators to collectively share information each regulator
has with respect to products and trading activity under its
jurisdiction, to help the Commission and other regulators carry out
their respective oversight of products and trading activity within
their own jurisdiction? Would such sharing of information help the
Commission better understand the impact of trading in other markets on
trading activity and products within the Commission's jurisdiction?
---------------------------------------------------------------------------

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

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

provide cost estimates for the provision of this data by the central
repository to the SROs and the Commission.
    Proposed Rule 613(e)(4)(i) also would require that the NMS plan
include policies and procedures, including standards, to be used by the
plan processor to ensure the security and confidentiality of all
information submitted to, and maintained by, the central repository.
The plan sponsors, and employees of the plan sponsors and central
repository, would be required to agree to use appropriate safeguards to
ensure the confidentiality of such data, and not to use such data for
other than for surveillance regulatory purposes.\244\ The Commission is
not proposing to mandate the content or format of the policies and
procedures and standards that would be required. Rather, the Commission
believes that the SROs themselves are in the best position to determine
how best to implement this requirement.
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    \244\ See proposed Rule 613(e)(4)(i). However, a plan sponsor
would be permitted to use the data that it submits to the central
repository for regulatory, surveillance, commercial, or other
purposes as otherwise permitted by applicable law, rule or
regulation. Id.
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    The Commission requests comment generally on the issue of
appropriate safeguards to be put in place by the SROs and the central
repository to help ensure confidentiality. Are there specific
safeguards that the SROs and the central repository could use to ensure
the confidentiality and appropriate usage of the data collected and
submitted pursuant to the proposed Rule? For example, should the
proposed Rule require that SROs put in place specific information
barriers or other protections to help ensure that data is used only for
regulatory purposes? Should there be an audit trail of the SROs'
personnel access to, and use of, information in the central repository
to help monitor for compliance with appropriate usage of the data?
Should the requirement that the NMS plan include policies and
procedures to be used by the plan processor to ensure the security and
confidentiality of information submitted to, and maintained by, the
central repository be expanded to include the content of any searches
or queries performed by the SROs or the Commission on the data? What
should be required? Please be specific in your answer.
    The Commission would establish appropriate protections within the
agency to help ensure the confidentiality of the records.
3. Reliability of Data Collected and Consolidated
    An audit trail is only as reliable as the data used to create it.
The Commission believes that it is critical to the integrity of the
consolidated audit trail that the data submitted by the national
securities exchanges, national securities associations and their
members be submitted in a timely manner, and be accurate and complete.
Proposed Rule 613(e)(4)(ii) therefore would require that the NMS plan
include policies and procedures, including standards, for the plan
processor to use to help ensure the integrity of the information
submitted to the central repository. Specifically, the policies and
procedures would be required to be designed to help ensure the
timeliness, accuracy, and completeness of the data provided to the
central repository by the SROs and their members. The Commission
expects that these policies and procedures would include the creation
of certain validation parameters that would need to be met before data
would be accepted into the central repository.
    The proposed Rule also would require that the NMS plan include
policies and procedures, including standards, governing how and when
the plan processor should reject data provided to the central
repository that does not meet these validation parameters. Further, the
proposed Rule would require the NMS plan to include policies and
procedures that would govern how to re-transmit data that was rejected
once it has been corrected, and how to help ensure that information is
being resubmitted.\245\ The Commission expects that re-transmitted data
would also be subject to the validation parameters to assure that the
initial problem(s) with the data has been corrected.
---------------------------------------------------------------------------

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

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

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

violations, as well as other Commission and SRO rules. The Commission
understands that although SROs carry out certain surveillances in real
time, such as for looking for pricing anomalies or other indicators of
erroneous transactions, most surveillance currently is not done on a
real time basis. The Commission preliminarily believes the systems that
carry out this surveillance should be updated, or new systems should be
created, to make use of the consolidated audit trail information that
would be generated and maintained by the central repository, otherwise
the purpose of requiring a consolidated audit trail would not be
achieved.
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    \247\ See proposed Rule 613(a)(3)(iv). The SROs would be
required to begin reporting information to the central repository
within twelve months after effectiveness of the NMS plan. The
Commission is proposing to allow SROs two additional months (for a
total of fourteen months) to update their surveillance systems to
allow for testing of new surveillances for some period of time after
the SROs begin providing information. The Commission requests
comment on this time period. Should it be longer? Shorter? If so,
why?
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    The Commission generally requests comment on this proposed
requirement, as well as the proposed timing for compliance. To what
extent do SROs currently conduct surveillance of trading on their
markets on a real time basis? To what extent could SROs make effective
use of the proposed consolidated information to enhance or update their
existing surveillance and regulation? How would SROs be able to enhance
or change their existing surveillance and regulation to make use of the
proposed consolidated information? Would the benefits of surveillance
that the SROs would be able to undertake be justified by the costs of
providing information to the central repository on a real time basis?
Under the proposed Rule, national securities exchanges and national
securities associations would be required to implement or enhance their
surveillance systems prior to their members being required to provide
information pursuant to the proposed Rule. Do commenters believe that
surveillance systems should be in place in advance of member compliance
or should these requirements happen simultaneously, or otherwise?
    The Commission is not proposing at this time to require coordinated
surveillance across exchanges and FINRA. Rather, the Commission intends
that each SRO would be responsible for surveillance of its own market
and its own members using the consolidated audit trail information. The
Commission would, however, encourage any coordinated surveillance
efforts by the SROs, such as through a plan approved pursuant to Rule
17d-2 under the Exchange Act,\248\ or a regulatory services agreement
among one or more SROs. The Commission requests comment on whether it
should undertake to require coordinated surveillance.
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    \248\ 17 CFR 240.17d-2. For example, the exchanges have entered
into an agreement for the allocation of regulatory responsibilities
pursuant to Rule 17d-2 under the Exchange Act concerning the
surveillance, investigation, and enforcement of insider trading
rules pertaining to members of the NYSE and FINRA who are also
members of at least one of the other participating SROs. See
Securities Exchange Act Release No. 58806 (File No. 4-566) (October
17, 2008), 73 FR 63216 (October 23, 2008).
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H. Compliance With the NMS Plan

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

association would be required to file with the Commission pursuant to
Section 19(b)(2) of the Exchange Act \254\ and Rule 19b-4
thereunder,\255\ a proposed rule change to require its members to
comply with the requirements of the proposed Rule and the NMS
plan.\256\ The SROs would be required to file these proposed rule
changes by 120 days after approval of the proposed Rule. The Commission
preliminarily believes that this proposed time frame would provide the
SROs sufficient time to file their proposed rule changes after the NMS
plan has been approved,\257\ as the SRO rule filings would be
substantially based on the content of the NMS plan.
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    \254\ 15 U.S.C. 78s(b)(2).
    \255\ 17 CFR 240.19b-4.
    \256\ See proposed Rule 613(g)(1). This provision in the
proposed Rule echoes the requirement contained in Rule 608 that
provides ``each self-regulatory organization also shall, absent
reasonable justification or excuse, enforce compliance with any such
plan by its members and persons associated with its members,'' 17
CFR 242.608(c).
    \257\ The proposed Rule would require that the NMS plan be filed
within 90 days of approval of the proposed Rule. See proposed Rule
613(a)(1).
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    Further, the proposed Rule would directly require each member to
(1) collect and submit to the central repository the information
required by the Rule, and (2) comply with the clock synchronization
requirements of the proposed Rule.\258\ In addition, the proposed Rule
would require that the NMS plan include a provision that by subscribing
to and submitting the plan to the Commission, each exchange and
association that is a sponsor to the plan agrees to enforce compliance
by its members with the provisions of the plan.\259\
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    \258\ See proposed Rule 613(g)(2).
    \259\ See proposed Rule 613(g)(3).
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    Finally, the proposed Rule would require the NMS plan to include a
mechanism to ensure compliance with the requirements of the plan by the
members of a national securities exchange or national securities
association that is a sponsor of the NMS plan submitted pursuant to
this Rule and approved by the Commission.\260\ The purpose of this
provision is to require the SROs to implement a method to help ensure
compliance with the NMS plan and the corresponding SRO rules by their
members. Although the Commission is not proposing to mandate the format
of the mechanism, the Commission preliminarily believes that it could
include the imposition of fines on a member by an SRO of which it is a
member in the event the member failed to comply with any provision of
the NMS plan or the SRO's rules implementing the NMS plan. Any action
taken against the member, including the imposition of the fine by the
SRO, would be subject to the requirements of the SRO's other
rules.\261\
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    \260\ See proposed Rule 613(g)(4).
    \261\ See Sections 6(b)(6), 6(b)(7), and 6(d)(1) of the Exchange
Act, 15 U.S.C. 78f(b)(6), 78f(b)(7), and 78f(d)(1). See also, e.g.
FINRA Rule 9217, CHX Article 12, Nasdaq OMX BX Rule 9216 and IM-9216
and NYSE Rule 476A.
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    The Commission requests comment on these provisions regarding
members' compliance with the proposed Rule and the NMS plan. Do
commenters believe that these provisions would encourage members'
compliance with the proposed Rule and the NMS Plan? If so, why? If not,
what other provisions would be necessary or appropriate to promote
compliance? What mechanisms should be part of a plan to promote
compliance by members? Would it be appropriate to include violations of
the proposed Rule, the NMS plan, or the SRO's rules implementing the
NMS plan within existing SRO rules that impose minimum fines for
violations of certain SRO rules? \262\ Would the exchanges or
associations have to amend their rules to implement such a requirement?
If so, how would they have to amend their rules? Are there other
alternatives that would more effectively help ensure the accuracy and
reliability of the information reported to the central repository by
members? Would requiring the SROs to file their proposed rule changes
to implement the requirements of the NMS plan with respect to the
members within 120 days after approval of the proposed Rule provide
sufficient time for SROs to draft the proposed rule changes? If not,
why not?
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    \262\ See, e.g., FINRA Rule 9217 (providing for the imposition
of fines in lieu of commencing a formal disciplinary proceeding for
violations of certain rules, including the recording and reporting
requirements of the OATS rules) and NYSE Rule 476A (providing for