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

    Other commenters also stated their general support for the creation
of a consolidated audit trail. According to Direct Edge Holdings, LLC
(``Direct Edge''), ``[t]he proposed consolidated audit trail (`CAT')
system would significantly enhance the capabilities of regulators to
police trading across asset classes; replace existing audit trails and
consolidate trading and execution data for the asset classes under the
Commission's jurisdiction * * * enable regulators to create a more
complete timeline of an order's lifecycle; and facilitate large-scale
market reconstructions * * * .'' \108\
---------------------------------------------------------------------------

    \108\ See Direct Edge Letter, p. 1. Direct Edge is the parent of
two SROs, EDGA Exchange, Inc. and EDGX Exchange, Inc.
---------------------------------------------------------------------------

    Although CBOE expressed some concerns in its comment letter about
the ``breadth, expense, and timetable of the Proposal'' \109\ (concerns
that were shared by other commenters),\110\ it ``recognizes there are
potential benefits to be obtained from CAT, and agrees that a central
repository with uniform data submitted by all markets could enhance SRO
and SEC oversight of the markets.'' \111\ CBOE further stated that,
``[i]n particular, a CAT that contains a customer identifier on an
order by order basis would enhance significantly the audit trails of
the markets.'' \112\
---------------------------------------------------------------------------

    \109\ See CBOE Letter, p. 2.
    \110\ See, e.g., Scottrade Letter, p. 1; ICI Letter, p. 4-6;
FINRA/NYSE Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter,
p. 1-2; SIFMA Letter, p. 3-8; Direct Edge Letter, p. 3; FINRA
Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p. 2-3;
Leuchtkafer Letter; Broadridge Letter, p. 3; SIFMA Proposal Letter,
p. 1; FINRA Proposal Letter, p. 3.; Liquidnet Letter, p. 3 & p. 5-6;
Ameritrade Letter, p. 2-3
    \111\ Id.
    \112\ Id.
---------------------------------------------------------------------------

    BATS Exchange, Inc. (``BATS'') expressed general support for the
Commission's proposal, stating, ``[o]ver the last several years,
liquidity has dispersed across multiple interconnected venues, such
that no one market center can claim a majority share of equity
securities transactions. However, regulatory tools have not evolved to
keep pace with these changes, and the limited existing processes and
data available to analyze inter-market trading are inadequate. As a
consequence, regulators rely on inefficient processes to reconstruct
inter-market trading activity, including ad hoc requests to members for
trading data when a potential problem is identified.'' \113\
---------------------------------------------------------------------------

    \113\ See BATS Letter, p. 1.
---------------------------------------------------------------------------

    Liquidnet, Inc. (``Liquidnet''), an ATS, generally stated that,
``[i]n the long run, a properly-designed system that provides for
centralized reporting of data should be more cost-efficient than the
current patchwork system for collecting audit trail data.'' \114\
Liquidnet outlined seven specific benefits of a consolidated audit
trail, ranging from ``[reducing] the time that regulatory personnel
must expend to request and collect data from market participants on a
case-by-case basis,'' to ``[reducing] the cost of reconstructing,
analyzing, and reporting on significant market events such as those
that occurred on May 6, 2010.'' \115\
---------------------------------------------------------------------------

    \114\ See Liquidnet Letter, p. 1.
    \115\ Id. at p. 1-2.
---------------------------------------------------------------------------

    The Securities Industry and Financial Markets Association
(``SIFMA''), an industry group that represents, among other entities,
hundreds of securities firms that could be impacted by the creation of
a consolidated audit trail, ``believes that a centralized and
comprehensive audit trail would enable the SEC and securities self-
regulatory organizations (`SROs') to perform their monitoring,
enforcement, and regulatory activities more effectively.'' \116\ SIFMA
further states that, ``[i]n the current era of electronic trading,
regulators need efficient access to order and execution data from both
broker-dealers and exchanges. Indeed, a consolidated audit trail is a
much-needed improvement over today's fragmented audit trail
platforms.'' \117\ As did a number of other commenters,\118\ SIFMA also
expressed concerns about, and suggested alternatives to, some specific
aspects of the proposed Rule, which will be further discussed below.
---------------------------------------------------------------------------

    \116\ See SIFMA Letter, p. 1-2.
    \117\ Id. at p. 2.
    \118\ See, e.g., FINRA/NYSE Euronext Letter, p. 7, FINRA Letter,
p. 3, FINRA Proposal Letter, p. 1-16, FTEN Letter, p. 1, 4-5,
Correlix Letter, p. 2-3; BOX Letter, p. 2; BATS Letter, p. 2.; CBOE
Letter, p. 2; Angel Letter, p. 2; Wells Fargo Letter, p. 2; Knight
Letter, p. 3; FIF Letter, p. 5-6; Schumer Letter, p. 1.
---------------------------------------------------------------------------

    Finally, the Commission notes that members of the Financial
Information Forum, whose participants include ``trading and back office
service bureaus, broker-dealers, market data vendors and exchanges,''
agree that ``an enhanced audit trail system could increase the
effectiveness of cross-market surveillance through better data
availability and integration.'' \119\
---------------------------------------------------------------------------

    \119\ See FIF Letter, p. 1.
---------------------------------------------------------------------------

    When the perspectives of these commenters are combined with the
Commission's own experiences (as described above in Section II.A.1.c.),
a common theme emerges: There is substantial room for improvement in
the collection of and access to trading data beyond what is available
today from existing audit trails and other sources. The Commission
agrees with many of the commenters that one of the main benefits of a
consolidated audit trail will be to improve the efficiency and adequacy
of a regulatory process of collecting and accessing audit trail data
that directly affects and impacts a significant number, and wide
variety, of market participants.
2. Commenters' Views on the Overall Costs of the Proposed Rule and the
Resulting Framework of the Adopted Rule
    With respect to general costs for the proposal, commenters
expressed differing views. As discussed below, some commenters thought
that the Commission overestimated the burdens of creating,
implementing, and maintaining a consolidated audit trail, while others
argued that the Commission had underestimated such burdens.
    Nasdaq was among those commenters that stated that the Commission
had overestimated the burdens. Specifically, Nasdaq stated that
``innovative technology exists to meet many of the Commission's goals
at significantly

lower costs than estimated in the Proposing Release,'' and that SROs
should be able to weigh the costs and benefits of various designs.\120\
Other commenters also expressed similar opinions stating that a
consolidated audit trail accomplishing the Commission's goals could be
implemented for less than the preliminary estimates.\121\ Two firms
with experience in processing and analyzing market data, FTEN and
Thomson Reuters, each noted that current technology could convert data
from disparate systems into a uniform format, resulting in a less
costly implementation of the consolidated audit trail.\122\ FTEN stated
that ``currently available commercial systems are capable of
immediately accomplishing CAT goals of real-time cross-market
transparency, accountability and control with no implementation risk
and for far less than the estimated multi-billion dollar price tag.''
\123\ It further suggested that ``[t]he SEC should leverage already
deployed and commercially available solutions that are in production
use today by major market participants * * * .'' and an ``iterative
approach [that] would leverage existing systems to capture order and
execution data in real-time from liquidity destinations (exchanges,
ECNs, ATSs and dark pools) and `map' the data back to original trade
submissions by market participants without requiring integration with,
or changes to, market participants systems or to liquidity destination
systems and without modifying existing order flow.'' \124\ Similarly,
another commenter recommended a technology solution that could handle
the required data in milliseconds and that ``significantly reduces disk
space required, which can potentially save millions of dollars when
dealing with multiple terabytes of data.'' \125\ One commenter
suggested an entirely different approach through the use of an
``adaptive graph indexing-based architecture'' as the basis for the
consolidated audit trail platform, instead of using a central
repository, and explained that this technology would keep trading data
within each SRO.\126\
---------------------------------------------------------------------------

    \120\ See Nasdaq Letter I, p. 2.
    \121\ See Thomson Reuters Letter, p. 2; Noetic Partners Letter,
p. 2; FTEN Letter, p. 1; Ross Letter; Correlix Letter, p. 2.; FINRA
Proposal Letter, p. 2.; High Speed Letter, p. 1; Belanger Letter, p.
7-8; Aditat Letter, p. 2 (stating that FIX protocol is already used
in the industry today, making it cheaper to create systems to handle
consolidated audit trail data as the data already exists in a
``suitable format'').
    \122\ See FTEN Letter, p. 13; Thomson Reuters Letter, p. 2-3.
    \123\ See FTEN Letter, p. 1.
    \124\ Id. at p. 3.
    \125\ See Know More Software Letter, p. 1.
    \126\ See Belanger Letter, p. 4.
---------------------------------------------------------------------------

    On the other hand, numerous commenters expressed general concerns
about the costs of implementing a consolidated audit trail relative to
the benefits to be gained. For example, one commenter stated that
``there can be no doubt whether market regulators need a consolidated
audit trail;'' however, the commenter questioned whether a system as
costly as the consolidated audit trail was necessary to detect
violations such as frontrunning, spoofing, and layering, which are
violations the Commission has rarely pursued in the recent past.\127\
---------------------------------------------------------------------------

    \127\ See Leuchtkafer Letter, p. 4. See also IAG Letter, p. 3.
---------------------------------------------------------------------------

    As discussed above, many commenters expressed general support for
the creation of a consolidated audit trail, but believed that, as
proposed, the implementation would be too costly and that the Rule
should be modified.\128\ Concern about the proposed real-time
requirements for reporting data to the central repository was a common
theme expressed by these commenters,\129\ including those who
maintained that a requirement to provide data on a real-time basis
would be too burdensome due to the extensive systems changes that would
be needed to comply with such a requirement.\130\ Some of these
commenters argued that a real-time reporting requirement would require
many industry participants to build entirely new systems or undertake
significant technological upgrades.\131\ SIFMA, in particular,
estimated that the cost per broker-dealer to implement real-time
reporting could be millions of dollars and that the cost of capturing
options quotes in real time alone could exceed the Commission's $2.1
billion estimate for the annualized cost of the audit trail.\132\ SIFMA
further argued that broker-dealers would incur costs associated not
only with establishing and maintaining the infrastructure to support
real-time reporting, but also due to regulatory risk if they are not
able to achieve 100 percent compliance with the proposed Rule.\133\
While SIFMA opposed a real-time reporting requirement, and encouraged
the Commission to adopt a next day or later reporting requirement,\134\
SIFMA also stated that ``if the SEC determines to require reporting of
certain data elements in real-time or near real-time, we believe such
data should be limited to reporting of `key business events.' '' \135\
SIFMA further stated that, ``if the definition of real-time allowed for
reporting within minutes (e.g. 10-15 minutes) of the events, it would
be substantially less intrusive on order management systems and may
allow for greater flexibility in designing reporting systems
architecture and more standardized content for events such as order
modifications * * * .'' \136\ SIFMA described how a reporting system
using ``drop copies'' \137\ could be ``achievable in the relative near
term,'' although it noted that its proposed process would not, among
other things, include a unique Customer ID or a unique order
identifier.\138\
---------------------------------------------------------------------------

    \128\ See, e.g., SIFMA Letter, p. 2, 15-16; FINRA/NYSE Euronext
Letter, p. 7; FINRA Letter, p. 3; Angel Letter, p. 2; CBOE Letter,
p. 2-6 (suggesting several ways that the costs of the proposal could
be reduced, including: Leveraging existing SRO experience with audit
trail systems and imposing uniformity across markets in those
systems; requiring the submission of audit trail information through
a batch process after the close of the trading day; deleting the
requirement that all market maker quotes be submitted to the
proposed consolidated audit trail; making clear that broker-dealers
have no obligation to report order information that has already been
reported to an exchange; and revisiting the need for a large trader
reporting system if that proposed rule is adopted.).
    \129\ See Scottrade Letter, p. 1; ICI Letter, p. 4-6; FINRA/NYSE
Euronext Letter, p. 4; GETCO Letter, p. 2; BATS Letter, p. 1-2;
SIFMA Letter, p. 3-8; CBOE Letter, p. 4-5; Direct Edge Letter, p. 3;
FINRA Letter, p. 10-13; Wells Fargo Letter, p. 3; Knight Letter, p.
2-3; Leuchtkafer Letter; Broadridge Letter, p. 3; FIF Letter, p. 4;
SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1; FINRA Proposal
Letter, p. 3; SIFMA February 2012 Letter; FIA Letter, p. 1-2.
    \130\ See Section III.F.2., infra; see also, e.g., BATS Letter,
p. 1-2; Broadridge Letter, p. 3; FIF Letter, p. 4-5; FINRA/NYSE
Euronext Letter, p. 7; FINRA Letter, p. 3; ICI Letter, p. 4-5;
Knight Letter, p. 2; Scottrade Letter, p. 1-2; SIFMA Letter, p. 3-6;
SIFMA February 2012 Letter. Some commenters also questioned whether
the costs to provide data on a real-time basis would outweigh the
benefits. See Scottrade Letter, p. 1-2; FINRA/NYSE Euronext Letter,
p. 4; GETCO Letter, p. 2; BATS Letter, p. 2; SIFMA Letter, p. 3-8;
CBOE Letter, p. 4; FINRA Letter, p. 11-13; Wells Fargo Letter, p. 3;
ICI Letter, p. 4-6; GETCO Letter, p. 2; Direct Edge Letter, p. 3;
Leuchtkafer Letter; SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1;
FINRA Proposal Letter, p. 3; SIFMA February 2012 Letter; FIA Letter,
p. 2.
    \131\ See Scottrade Letter, p. 1-2; ICI Letter, p. 4-5; SIFMA
Letter, p. 4; Knight Letter, p. 2. See also Broadridge Letter, p. 3;
FIF Letter, p. 4; FIA Letter, p. 2.
    \132\ See SIFMA Letter, p. 4-6.
    \133\ Id. at p. 5.
    \134\ See SIFMA Letter, p. 3-4.
    \135\ See SIFMA Drop Copy Letter.
    \136\ Id.
    \137\ A ``drop copy'' is an electronic copy of a message
automatically generated by the existing order management and
execution systems used by broker-dealers and SROs.
    \138\ See SIFMA Drop Copy Letter.
---------------------------------------------------------------------------

    Commenters also expressed general concerns regarding the costs of
other aspects of the Proposed Rule. For example, Global Electronic
Trading Company (``GETCO''), a market maker in equities and equity
options, urged the Commission to consider whether quotation information
already

disseminated by SROs could be reported instead of requiring the SROs
and their members to report all quotation information to reduce costs
for the industry.\139\ Another commenter, Wells Fargo Advisors, argued
that the inclusion of a unique customer identifier would add
``tremendous incremental cost to the [consolidated audit trail].''
\140\
---------------------------------------------------------------------------

    \139\ See GETCO Letter, p. 3-4.
    \140\ See Wells Fargo Letter, p. 3.
---------------------------------------------------------------------------

    Many commenters provided suggestions and views on how the costs of
creating and implementing a consolidated audit trail might be lowered.
For example, financial technology firm, Correlix, Inc. (``Correlix''),
stated that relying on existing infrastructure, where possible, could
bring down the cost and amount of time it would take to implement the
consolidated audit trail.\141\ Correlix further stated that existing
technology already is able to provide ``a complete end-to-end history
of message and order data from the market participant to the execution
venue's matching engine and back to the originator,'' and that allows
clients to run customized queries and reports on the data.\142\
---------------------------------------------------------------------------

    \141\ See Correlix Letter, p. 2-3.
    \142\ Id.
---------------------------------------------------------------------------

    A variety of commenters, including SROs and broker-dealers, also
believed it would be more cost efficient to use the existing OATS
infrastructure specifically as a basis for a consolidated audit trail,
rather than to purchase or create an entirely new system.\143\
Commenters further argued that existing audit trails could be expanded
economically and quickly.\144\
---------------------------------------------------------------------------

    \143\ As discussed in Section II.C.4, infra, both SIFMA and
FINRA submitted several comment letters with increasing levels of
detail on the extent to which existing infrastructures could be used
to achieve different forms of the various reporting requirements of
the proposed Rule. In one of its later comment letters, FINRA
submitted a detailed blueprint describing how it would build a
consolidated audit trail that it believed would meet the primary
objectives of the proposed Rule in a relatively short timeframe and
with minimum costs to the industry. See FINRA Proposal Letter; SIFMA
Letter, p. 16-18. See also BOX Letter, p. 2; BATS Letter, p. 2.;
CBOE Letter, p. 2-3; Angel Letter, p. 2-3; Wells Fargo Letter, p. 2;
Knight Letter, p. 3; FIF Letter, p. 5-6; Schumer Letter, p. 1; FIA
Letter, p. 3.
    \144\ See, e.g., FINRA/NYSE Euronext Letter; FINRA Letter;
Schumer Letter, p. 1.
---------------------------------------------------------------------------

    In contrast, other commenters expressed the view that costs could
be reduced not by using existing audit trail infrastructures, but
rather by using new, innovative technology to create the consolidated
audit trail.\145\ Noetic Partners, a financial technology firm,
explained that technologies are currently available to build a system
that would capture ``full-depth'' data with ``compression and near-line
storage'' in a system that would enable fast retrieval and analysis of
data, and opined that, based on existing technology, a consolidated
audit trail could be implemented for substantially less than the
Commission's preliminary estimates.\146\ This commenter stated that,
based on available technology, a fully functional consolidated audit
trail could be implemented in months, rather than years, at an initial
cost of less than $100 million.\147\
---------------------------------------------------------------------------

    \145\ See Noetic Partners Letter II, p. 2; High Speed Letter, p.
1 (opining that estimated costs could be reduced if data were stored
in an off-the-shelf cloud-based storage system or if a petabyte
storage facility was built to store data and also estimating that
``an integrated analysis system combining bespoke software for
first-cut filtering of data from the repository, along with
[commercial off-the-shelf software] for detailed analysis, could be
developed for less than $10M''). See also Know More Software Letter,
p. 1; Belanger Letter, p. 4; FTEN Letter, p. 1, 13.
    \146\ See Noetic Partners Letter II, p. 2.
    \147\ Id.
---------------------------------------------------------------------------

    An aggregate analysis of the many specific opinions described above
suggests that commenters' views regarding the costs of creating,
implementing, and maintaining a consolidated audit trail fall into one
of two general categories. One set of commenters expressed the view
that many, if not all, of the requirements of the proposed Rule could
be met in a cost-effective fashion if current audit trail systems were
replaced with new technologies and systems. However, another set of
commenters expressed the view that a number of the requirements of the
proposed Rule would be very costly to implement, and, instead,
suggested that the most cost-effective method of creating a
consolidated audit trail would be to relax some of the proposed
requirements and build upon the infrastructure of existing audit trail
systems.
    Therefore, as discussed above and in detail below,\148\ in response
to these comments, and specific comments discussed throughout this
Release,\149\ the Commission is adopting Rule 613 with substantive
changes to some of the specific collection, reporting, and data
requirements of the Rule.\150\ The Commission believes that these
changes significantly expand the solutions that could be considered by
the SROs for creating, implementing, and maintaining a consolidated
audit trail and provide the SROs with increased flexibility in how they
choose to meet the requirements of the Rule compared with the
requirements of the proposed Rule. For example, the Rule no longer
requires real-time reporting \151\ or only one unique order identifier;
\152\ thus, the Rule would accommodate an NMS plan based on the types
of solutions proposed by SIFMA and FINRA. However, to guide the SROs in
their development of the NMS plan, the Rule includes several specific
considerations \153\ that the Commission intends to use to evaluate the
submitted NMS plan and consider its costs and benefits.
---------------------------------------------------------------------------

    \148\ See Section I., supra.
    \149\ See, generally, Section III., infra.
    \150\ See Section I., supra, for a summary of the changes to
proposed Rule 613.
    \151\ See Rule 613(c)(3); Section I., supra; Section III.B.1.e.,
infra.
    \152\ See Rule 613(j)(1); Section I., supra; Section
III.B.1.d.iv., infra.
    \153\ See Rule 613(a)(1)(i) through (xii); Section I., supra;
Section III.C.2.a., infra.
---------------------------------------------------------------------------

    The changes from the Proposing Release provide the SROs with the
flexibility to submit an NMS plan that provides creative solutions that
harness innovative technology or that build on existing audit trail
systems.
3. Comments on the Process for Creating a Consolidated Audit Trail
    The Commission received comments regarding the process through
which a consolidated audit trail should be created. As proposed, the
Rule required that the SROs submit an NMS plan setting forth the
details for the creation, implementation, and maintenance of a
consolidated audit trail within 90 days of approval of the Rule. A few
commenters suggested that more time be allotted for the planning and
design of the NMS plan.\154\ FIF and the Security Traders Association
(``STA'') recommended extensive, ``up-front business analysis,'' \155\
explaining that if conducted ``during the CAT plan development process,
[they] are confident that issues would emerge earlier in the process,
leading to more efficient and cost-effective solutions.'' \156\ These
commenters believed that the business analysis would require many
discussions involving the Commission, the SROs and teams comprising
members of the securities industry.\157\
---------------------------------------------------------------------------

    \154\ See FIF Letter II, p. 2-3; STA Letter, p. 2; Nasdaq Letter
I, p. 6-7.
    \155\ See FIF Letter II, p. 1, 3; STA Letter, p. 1, 3.
    \156\ See FIF Letter II, p. 2; STA Letter, p. 1.
    \157\ See FIF Letter II, p. 1; STA Letter, p. 1-2.
---------------------------------------------------------------------------

    In this regard, several commenters suggested that the Commission
undergo a RFP or request for information (``RFI'') process to create
and implement a consolidated audit trail.\158\ Specifically, FIF urged
the Commission to perform a RFP process ``to determine the best
technical solution for developing a

consolidated audit trail.'' \159\ FIF suggested that the Commission
``should outline a set of goals and guiding principles they are
striving to achieve as part of the adopted CAT filing and leave the
determination of data elements and other technical requirements to [an]
industry working group.'' \160\ Similarly, Direct Edge suggested that
Commission staff should form and engage in a working group to develop
an RFP for publication by the Commission.\161\ DirectEdge explained
that an RFP process would facilitate the identification of the costs
and benefits of the audit trail, as well as the consideration of a
wider range of technological solutions.\162\ Further, commenters,
including Broadridge Financial Solutions, Inc., a technology
provider,\163\ also requested more specific information about the audit
trail system to better assess the Commission's initial cost estimates
and to determine the best approach to the consolidated audit
trail.\164\
---------------------------------------------------------------------------

    \158\ See FIF Letter, p. 1, 9; FIF Letter II, p. 1-2; STA
Letter, p. 2; Direct Edge Letter, p. 2-3, 5.
    \159\ See FIF Letter, p. 1.
    \160\ See FIF Letter II, p. 2.
    \161\ See Direct Edge Letter, p. 2-3, 5. See also STA Letter, p.
1-3 (recommending the use of working groups comprising the
Commission, FINRA, exchanges, broker-dealers, investors, vendors,
and institutional asset managers to conduct business analysis and
requisite discussions with the industry in planning a consolidated
audit trail that meets the Commission's goals).
    \162\ Id. at p. 3.
    \163\ See Broadridge Letter, p. 2.
    \164\ See Broadridge Letter, p. 2; FIF Letter, p. 8. See also
Ross Letter, p. 1 (discussing examples of information security
details to consider); Nasdaq Letter I, p. 6 (stating that the
proposed Rule provided ``incomplete technical information on which
design and features make the most sense'').
---------------------------------------------------------------------------

    To gather the necessary information, commenters argued that the
timeframe for submitting an NMS plan should be extended. FIF and STA
opined that the time needed to perform the analysis to produce a
``detailed blueprint for CAT'' \165\ would be closer to six
months,\166\ rather than the proposed 90 days.\167\ As a basis for
their suggestions, FIF provided a breakdown of the time and the types
of work needed for FINRA's expansion of OATS to all NMS
securities.\168\ FIF noted that over one-third of the time required for
the project was spent on conducting business analysis, and that one-
third of the time was spent on project development.\169\
---------------------------------------------------------------------------

    \165\ See FIF Letter II, p. 1-2; STA Letter, p. 2.
    \166\ See FIF Letter II, p. 2; STA Letter, p. 2-3; see also
Nasdaq Letter I, p. 7 (arguing for ``scheduling flexibility at the
initial stage'' of designing the consolidated audit trail).
    \167\ See proposed Rule 613(a)(1).
    \168\ See FIF Letter II, p. 3. The commenter also provided the
cost to the industry for the expansion of OATS to all NMS stocks--
$48 million. The Commission notes that this is the cost for the
project as a whole, not solely for the planning phase, and therefore
is not entirely applicable to the cost of the creating and filing
the NMS plan required by Rule 613.
    \169\ The time remaining was spent on ``testing and other
activities.'' See FIF Letter II, p. 3.
---------------------------------------------------------------------------

    In response to these comments, the Rule requires the SROs to
provide more information and analysis to the Commission as part of
their NMS plan submission than would have been required under the
proposed Rule. As discussed in more detail below, these requirements
have been incorporated into the Rule as ``considerations'' that the
SROs must address, and they generally mandate that the NMS plan
submitted to the Commission for its consideration discuss certain
important features and details of the NMS plan, such as how data will
be transmitted to the central repository, as well as an analysis of NMS
plan costs and impact on efficiency, competition, and capital
formation, the process followed by the SROs in developing the NMS plan,
and information about the implementation plan and milestones for the
creation of the consolidated audit trail.\170\ These requirements are
intended to ensure that the NMS plan is the result of a thorough and
well-developed plan for creating, implementing, and maintaining the
consolidated audit trail, and the Proposing Release highlighted the
importance of these types of considerations. In Section III.C. below,
the Commission also provides details about how it envisions regulators
would use, access, and analyze consolidated audit trail data through a
number of ``use cases'' to help the SROs prepare a sufficiently
detailed NMS plan that addresses the requirements of the adopted
Rule.\171\
---------------------------------------------------------------------------

    \170\ See Section III.C.2.a., infra.
    \171\ See Section III.C.2.b., infra.
---------------------------------------------------------------------------

    Because of the additional information and analysis required to be
included in the NMS plan, the Commission is extending the amount of
time allowed for the SROs to submit the NMS plan. Rule 613(a)(1)
provides that ``[e]ach national securities exchange and national
securities association shall jointly file on or before 270 days from
the date of publication of the Adopting Release in the Federal Register
a national market system plan to govern the creation, implementation,
and maintenance of a consolidated audit trail and central repository as
required by this section.'' The Commission will publish the NMS plan
submitted in accordance with Rule 608 of Regulation NMS under the
Exchange Act \172\ for public comment and will approve the NMS plan if
the Commission determines it is necessary or appropriate in the public
interest, for the protection of investors and the maintenance of fair
and orderly markets, to remove impediments to, and perfect the
mechanisms of, a national market system, or otherwise in furtherance of
the purposes of the Act.\173\ The Commission also will consider whether
the NMS plan submitted for its consideration would achieve the
objectives of the Rule.
---------------------------------------------------------------------------

    \172\ 17 CFR 242.608.
    \173\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

4. Comments on Alternatives to the Proposed Consolidated Audit Trail
    Several commenters, many of whom generally supported the concept of
a consolidated audit trail, recommended alternatives for how a
consolidated audit trail should be created, implemented, and
maintained. In particular, the Commission received comments suggesting
various ways that the OATS system could be modified to serve as the
central repository for the consolidated audit trail. FINRA submitted a
blueprint for a modified version of OATS that listed certain changes to
address the Commission's proposed requirements for the creation,
implementation, and maintenance of the consolidated audit trail.\174\
The proposed modifications included, for example, the addition of data
elements capturing whether an order was solicited, customer account
type, a large trader identifier,\175\ and a unique identifier for
branch office and registered representative to the data reported to
OATS; \176\ using OATS to capture order and quote data from all
national securities exchanges and eventually OPRA; the inclusion of
options, fixed income securities, security-based swaps, principal
orders and orders originating in firm-controlled accounts for purposes
of working a customer order in OATS; the use of CRD numbers to identify
broker-dealers; an exchange data processing gateway for OATS to
validate submissions from exchanges; full access to regulators of
queryable consolidated audit trail data through the FINRA web portal;
\177\ and OATS' acceptance of limited drop-copy report information from
broker-dealers on a 15-minute reporting basis.\178\

However, FINRA's blueprint provided that the large trader identifier
should be used initially to identify market participants, as the
complexities of tracking retail accounts, the infrequent amount of
trading by retail investors, and the large number of such investors
make requiring a unique customer identifier difficult.\179\
---------------------------------------------------------------------------

    \174\ See FINRA Proposal Letter.
    \175\ See FINRA Proposal Letter, p. 4, 6 (arguing against
requiring the name and address of the beneficial owner of an
account, as well as of the individual making the investment
decision, and against requiring tax identification or social
security numbers for individual investors).
    \176\ Id. at p. 7 and Appendix B.
    \177\ Id.
    \178\ Id. at p. 3-4 (noting that this information would be
available for query by regulators within one hour of receipt, would
include a unique order identifier and MPID, and would be added on
T+1 to the ``order lifecycle'' using OATS and TRF data).
    \179\ Id. at p. 4.
---------------------------------------------------------------------------

    Another commenter from the academic field believed that a modified
version of OATS (including fields incorporating ultimate customer
account information, a reduction in the time stamp standard to
milliseconds or even microseconds, and standardized clock
synchronization requirements), coupled with a requirement that
exchanges must report to OATS, would allow OATS to fulfill the needs of
the consolidated audit trail in a less costly manner than originally
proposed.\180\ This commenter stated that the Commission's needs could
be met by ``a few tweaks to the existing trade reports and by extending
OATS to cover all NMS stocks and executions at exchanges.'' \181\
---------------------------------------------------------------------------

    \180\ See Angel Letter, p. 3 (also noting, ``While the OATS data
are extremely useful for understanding market behavior and for
searching for various violations, these data are not really needed
for real time surveillance. Real time surveillance is generally
focused on the question of whether or not some change needs to take
place immediately * * *. The extensive OATS data regarding the
handling of individual orders are more useful for economic analysis
and enforcement activities and do not need to be reported in real
time.'')
    \181\ Id.
---------------------------------------------------------------------------

    Several commenters, including SROs and broker-dealers, generally
believed that it would be more cost and time efficient to use a form of
OATS as a basis for the consolidated audit trail than to purchase or
create a new system.\182\ For example, FINRA/NYSE Euronext stated that
modifying existing systems would reduce both the time and cost to
develop a consolidated audit trail, explaining that ``the programming
changes needed to comply with an entirely new system are substantially
greater than expanding existing protocols,'' \183\ while BATS suggested
that significant cost savings may be realized by building a
consolidated audit trail that ``leverages elements of OATS.'' \184\
FINRA/NYSE Euronext also argued that existing audit trails could be
expanded ``economically and quickly,'' \185\ noting that use of such
systems, such as FINRA's OATS, could make the central repository
unnecessary.\186\ Similarly, FINRA believed that using OATS as a
foundation of the consolidated audit trail would make the consolidated
audit trail easier to implement,\187\ as opposed to building a new
system, which could take years to establish and would likely result in
``negative unintended consequences'' during development.\188\ FIF
suggested leveraging FINRA's Trade Reporting and Compliance Engine as a
basis for the coverage of debt securities.\189\
---------------------------------------------------------------------------

    \182\ See FINRA Proposal Letter; BOX Letter, p. 2; BATS Letter,
p. 2.; CBOE Letter, p. 2-3; Angel Letter, p. 2-3; SIFMA Letter, p.
16-18; Wells Fargo Letter, p. 2; Knight Letter, p. 3; FIF Letter, p.
5-6; Schumer Letter, p. 1; FIA Letter, p. 1-3.
    \183\ See FINRA/NYSE Euronext Letter, p. 7. See also FINRA
Letter, p. 3 (stating that ``the necessary components to an
effective, comprehensive, and efficient consolidated audit trail
are: (1) Uniform data (both data content and data format); (2)
reliable data; and (3) timely access to the data by SROs and the
SEC. FINRA believes this can be achieved most effectively,
efficiently, and expeditiously by expanding FINRA's existing OATS
requirements to additional securities and non-FINRA member broker-
dealers and by consolidating exchange data in a central repository
to be used with OATS data'').
    \184\ See BATS Letter, p. 2.
    \185\ See FINRA/NYSE Euronext Letter, p. 14; FINRA Letter.
    \186\ Id.
    \187\ See FINRA Letter, p. 6. Specifically, FINRA proposed
enhancements to OATS and outlined a phased approach for
implementation. It explained that, under its approach,
implementation would begin with equity securities in the first two
phases, followed by options in the third and fourth phases. FINRA
further proposed that it could ``establish an intraday abbreviated
order submission capability based on SIFMA's drop-copy proposal.''
FINRA estimated the initial cost for the first two phases of the
OATS enhancement would be between $100 to $125 million and the
ongoing annual costs to be between $30 million and $40 million.
While FINRA's proposal appears to include many of the elements
required by Rule 613, the Commission notes that the proposal does
not include a Customer-ID (which was similarly lacking in the SIFMA
proposal), nor would all broker-dealers be required to report order
information to the central repository (certain firms that route
orders exclusively to another reporting firm that is solely
responsible for further routing decisions would be exempt from
reporting obligations; additionally, FINRA proposed retaining
exemptive authority in certain limited situations to provide relief
to small member firms that do not otherwise qualify for exclusion
from the definition of an OATS Reporting Member). Further, FINRA's
proposal would not collect customers' names, addresses and account
numbers. See FINRA Proposal Letter, p. 10; 14-16; Appendix. The
Commission believes a unique Customer-ID and customer account
information are critical to the efficacy and usefulness of the
consolidated audit trail, and therefore is requiring the NMS plan
submitted for its consideration to include such information.
    \188\ Id. This commenter also noted that OATS compliance rates
have improved to over 99% since the system was first implemented,
and emphasized that creating a new system would result initially in
low compliance rates until users became familiar with the system.
Id. at p. 11; see also FINRA/NYSE Euronext Letter, p. 8.
    \189\ See FIF Letter, p. 6 (also providing thoughts on the
functionalities of OATS that should be considered in creating the
consolidated audit trail, such as OATS' ability to identify and
reject duplicative reporting; to link reports between firms and
Nasdaq exchanges without using a unique customer identifier; its
possible flexibility in incorporating additional order types; its
current incorporation of quote data; and its current identification
of index arbitrage and program trading, and ability to possibly add
a large trader identification field ``to enhance analysis of high
volume, algorithm trading'').
---------------------------------------------------------------------------

    Two SROs, BOX and CBOE, recommended the joint use of both OATS and
COATS.\190\ BOX suggested an expansion of OATS and COATS to include
customer information,\191\ and CBOE stated that it believed that
certain aspects of OATS and COATS could be combined, with the addition
of customer and routing broker information, and new formats.\192\ The
Commission also received an alternative proposal from a commenter that
was not based on OATS, but on a combination of automatically-generated
drop-copies and the Financial Information eXchange (``FIX'')
protocol.\193\ SIFMA urged reporting on a T+1 basis as it believed
real-time reporting would require significant changes to existing order
management and trading systems.\194\ If T+1 reporting were not adopted,
however, SIFMA's proposal suggested that certain data be provided to
the central repository in near real time, such as data pertaining to
``key business events'' such as order receipt and origination, order
transmittal, execution, modification, and cancellation. SIFMA's
proposal listed the specific data elements to be reported for each
event, but, to achieve quick implementation, did not include unique
customer or order identifiers, or an identifier for algorithmic
orders.\195\
---------------------------------------------------------------------------

    \190\ See BOX Letter, p. 2; CBOE Letter, p. 2.
    \191\ See BOX Letter, p. 2.
    \192\ See CBOE Letter, p. 2.
    \193\ See SIFMA Drop Copy Letter. The FIX Protocol is a series
of messaging specifications for the electronic communication of
trade-related messages. It has been developed through the
collaboration of banks, broker-dealers, exchanges, industry
utilities and associations, institutional investors, and information
technology providers from around the world. These market
participants share a vision of a common, global language for the
automated trading of financial instruments. See http://fixprotocol.org/what-is-fix.shtml (last viewed on May 30, 2012).
    \194\ Id. at p. 1.
    \195\ Id. at p. 1-2.
---------------------------------------------------------------------------

    The Commission has considered the comments on alternative
proposals, including those based on OATS, and has made significant
modifications to the proposed Rule in light of such comments. Each of
these modifications is discussed in detail in Section III. below. But
the Commission notes more generally that, as adopted, Rule 613 does not
prescribe a specific audit trail collection system or a particular
method of data collection to be used for the central repository. In
addition, the Commission believes that certain modifications to Rule
613, such as

allowing data to be reported by 8:00 a.m. Eastern Time the following
trading day, rather than in real time as proposed, provide the SROs
with a wider range of options for how they choose to meet the
requirements of the adopted Rule compared with the requirements of the
proposed Rule. This wider range of options could more easily
accommodate an OATS-based approach or other approaches for the creation
of a consolidated audit trail, as suggested by commenters, consistent
with the requirements of Rule 613.
    The Commission notes, however, that OATS, in its current form, has
certain limitations and does not include certain attributes that the
Commission deems crucial to an effective and complete consolidated
audit trail.\196\ Some of the limitations of OATS that would need to be
addressed to meet the requirements of Rule 613 include:
---------------------------------------------------------------------------

    \196\ See Section II.A.1.c., supra.
---------------------------------------------------------------------------

     At present, only FINRA members are required to report
trade and order activity through OATS. The resulting exclusion of some
exchange-based and other types of non-member activity could lead to
significant gaps in the data as an order is generated, routed, re-
routed, and finally executed, canceled, or modified;
     OATS does not currently require the collection of market-
making quotes submitted by registered market makers (in those stocks
for which they are registered), resulting in further, significant gaps
in the data;
     OATS is a part of a process by which FINRA collects data
from its members for its own regulatory use. OATS is not a central
repository and therefore does not presently provide other regulators
with ready access to a central database containing processed,
reconciled, and linked orders, routes, and executions ready for query,
analysis, or download; and
     OATS does not presently collect options data, and does not
afford regulators an opportunity to perform cross-product surveillance
and monitoring;
     OATS does not collect information on the identities of the
customers of broker-dealers from whom an order is received. As
discussed above in Section I., the Commission believes that the
integrated inclusion of such data elements into a single consolidated
audit trail provides many important regulatory benefits.

III. Discussion

    A discussion of each of the key provisions of Rule 613, as adopted,
is set forth below.

A. NMS Plan

1. Description of the Rule
a. Implementation of the Consolidated Audit Trail Through an NMS Plan
    As proposed, the consolidated audit trail would have been created,
implemented, and maintained through an NMS plan approved by the
Commission. As proposed, Rule 613(a)(1) would have required each
national securities exchange and national securities association to
jointly file on or before 90 days from approval of the Rule an NMS plan
to govern the creation, implementation, and maintenance of a
consolidated audit trail and a central repository.\197\ The Commission
would then have been required to publish the NMS plan for public
comment pursuant to Rule 608 of Regulation NMS under the Exchange
Act,\198\ and, following the period of public comment, would consider
whether or not to approve the NMS plan. In the Proposing Release, the
Commission stated its expectation that the exchanges and FINRA would
``cooperate with each other and take joint action as necessary to
develop, file, and ultimately implement a single NMS plan to fulfill
this requirement.'' \199\
---------------------------------------------------------------------------

    \197\ This Section III.A. discusses the use of a NMS plan to
create, implement, and maintain a consolidated audit trail. Section
III.C., infra, focuses on the process the SROs must follow when
submitting the NMS plan to the Commission.
    \198\ 17 CFR 242.608. See Rule 613(a)(2).
    \199\ See Proposing Release, supra note 4, at 32568.
---------------------------------------------------------------------------

    The Commission requested comment on this approach. Specifically,
the Commission requested comment on whether requiring the exchanges and
FINRA to jointly file an NMS plan that would contain the requirements
for a consolidated audit trail was the most effective and efficient way
to achieve the objectives of Rule 613, or whether the Commission should
require the exchanges and FINRA to standardize or otherwise enhance
their existing rules. The Commission further requested comment on which
approach would be most efficient in improving the ability to monitor
cross-market trading, or to undertake market analysis or
reconstructions, and why.
    Two commenters discussed how the consolidated audit trail should be
created and implemented through an NMS plan.\200\ One noted that the
Rule should provide the SROs with sufficient flexibility to develop an
NMS plan that meets the overarching goals of the Commission.\201\ The
second suggested that the Rule should ``include only the elements
needed for a [consolidated audit trail], and then leave it up to the
SROs, [securities information processors] and involved vendors to
develop the specifications for the data elements to be specified in the
NMS plan, which would ultimately be subject to public comment and SEC
approval.'' \202\
---------------------------------------------------------------------------

    \200\ See Thomson Reuters Letter, p. 2; CBOE Letter, p. 7.
    \201\ See Thomson Reuters Letter, p. 2.
    \202\ See CBOE Letter, p. 7.
---------------------------------------------------------------------------

    Other commenters objected in principle to the use of an NMS plan to
create and implement the consolidated audit trail.\203\ One commenter
stated that implementing the consolidated audit trail through an NMS
plan would be ``difficult and inefficient,'' given the need ``to
respond and adapt quickly to new ways of trading and handling orders,''
and believed it would be difficult to jointly make necessary technology
changes under an NMS plan because, based on the commenter's experience
of collecting data for an existing audit trail, ``technology changes
and changes to technical specifications must be made regularly and
promptly with respect to firm-specific reporting requirements,
interpretations, and codes to keep up with complex and evolving trading
and routing strategies.'' \204\ Another commenter argued that an NMS
plan is ``unnecessary * * * given all of the governance issues with NMS
plans'' because ``[t]he Commission can get most of what it needs with a
few tweaks to the existing trade reports and by extending OATS to cover
all NMS stocks and executions at exchanges.'' \205\
---------------------------------------------------------------------------

    \203\ See FINRA Letter, p. 15; Angel Letter, p. 3.
    \204\ See FINRA Letter, p. 15.
    \205\ See Angel Letter, p. 3.
---------------------------------------------------------------------------

    For the reasons discussed below, the Commission continues to
believe that an NMS plan filed pursuant to Rule 608 of Regulation NMS
\206\ is the most effective mechanism to implement the consolidated
audit trail, and is adopting Rule 613 with a number of modifications
and clarifications to address the concerns of commenters.\207\
---------------------------------------------------------------------------

    \206\ See Rule 613(a). The proposed Rule provided that the NMS
plan must be filed with the Commission pursuant to Rule 608. Adopted
Rule 613(a)(2) clarifies that the NMS plan must also satisfy the
requirements set forth in Rule 608(a). See Rule 608(a) of Regulation
NMS; 17 CFR 242.608(a).
    \207\ See Section III.C., infra.
---------------------------------------------------------------------------

    The Commission believes that the creation, implementation, and
maintenance of the consolidated audit trail through an NMS plan will
ensure that the SROs' expertise as the ``front line'' regulators of
securities markets is drawn upon to develop the details of the
consolidated audit trail, and to make appropriate adjustments as
warranted to respond to changes in the securities markets and
technology going forward.

As such, under the Commission's approach, Rule 613 outlines a broad
framework for the creation, implementation, and maintenance of the
consolidated audit trail, including the minimum elements the Commission
believes are necessary for an effective consolidated audit trail.
Additionally, Rules 613(a)(1) and (a)(4), which require that each SRO
jointly file and be a sponsor of the NMS plan, is being adopted as
proposed. The Commission continues to believe that requiring all SROs
to jointly file the NMS plan to establish the consolidated audit trail,
as opposed to the flexibility provided by current Rule 608 of
Regulation NMS under the Exchange Act,\208\ which permits any two or
more SROs to submit an NMS plan, is appropriate because such a
requirement is expected to result in an NMS plan that is the product of
negotiation and compromise among all of the SROs; in this regard, the
NMS plan submitted to the Commission also may be more readily
implemented as the NMS plan should take into consideration the
capabilities of every SRO.
---------------------------------------------------------------------------

    \208\ 17 CFR 242.608. See Rule 613(a)(2).
---------------------------------------------------------------------------

    In response to the commenter that advocated granting additional
flexibility to the SROs in developing the requirements of the NMS
plan,\209\ the Commission has made significant modifications to the
Rule in several respects to increase the options available to SROs in
developing the requirements of the NMS plan.\210\ Furthermore, in
instances where Rule 613 sets forth minimum requirements for the
consolidated audit trail, the Rule provides flexibility to the SROs to
draft the requirements of the NMS plan in a way that best achieves the
objectives of the Rule. For example, Rule 613 requires the NMS plan
submitted to the Commission for its consideration to require material
terms of an order, such as order type, to be collected by the central
repository.\211\ However, the Rule does not enumerate specific order
types or prescribe the format or nature of how this information would
be represented. This would be left to the SROs developing the NMS plan
and allows flexibility for the future, when new order types may be
introduced and added, if appropriate.
---------------------------------------------------------------------------

    \209\ See Thomson Reuters Letter, p. 2.
    \210\ See Section I., supra; Sections III.B., III.C., infra.
    \211\ See Section III.B.1.d.i.(A)., infra.
---------------------------------------------------------------------------

    Similarly, in response to the commenter stating that implementing
the consolidated audit trail through an NMS plan would be ``difficult
and inefficient'' given the need to respond and adapt quickly to new
ways of trading and handling orders,\212\ the Commission notes that,
while the NMS plan submitted to the Commission for its consideration
must contain the minimum necessary elements for the consolidated audit
trail, and any amendments to an effective NMS plan initiated by plan
sponsors will require approval by Commission order, the SROs should
have flexibility to accommodate a variety of technological and other
market developments without amending the NMS plan (e.g., through the
issuance and updating of technical specifications that are reasonably
and fairly implied by the NMS plan). Underscoring this need to ensure
the consolidated audit trail is regularly updated to remain compatible
with best market practices, the Commission, as discussed in Section
III.C.2.a.i., also has added general requirements to Rule 613 with
regards to SROs monitoring and planning for the technological evolution
of the consolidated audit trail. Further, as noted in Section III.B.3
below, the NMS plan must include a governance structure for the central
repository that is designed to ensure efficient decision-making.
---------------------------------------------------------------------------

    \212\ See FINRA Letter, p. 15.
---------------------------------------------------------------------------

    The Commission has also considered the comment that recommended
that the Commission should leave it to the SROs, securities information
processors (``SIPs'') and vendors to develop the specifications for the
data elements in the NMS plan.\213\ The Commission agrees in principle
with the commenter, and believes that market participants other than
SROs also could have valuable insights regarding the design of the
specifications for the data elements, the central repository, and other
aspects of the Rule. To address this concern, the adopted Rule requires
the SROs to explain in the NMS plan the process by which they solicited
views of their members regarding the creation, implementation, and
maintenance of the consolidated audit trail, a summary of the views of
such members, and how the plan sponsors took such views into account in
preparing the NMS plan.\214\ In addition, the Rule requires the NMS
plan submitted to the Commission for its consideration to provide for
the creation of an Advisory Committee to afford SRO members, and other
interested parties as permitted by the NMS plan,\215\ the opportunity
to have input on the creation, implementation, and maintenance of the
consolidated audit trail.\216\ The Commission also notes that nothing
in the Rule precludes the SROs, as plan sponsors, from consulting with
others, including the SIPs and vendors, as they craft the NMS plan.
Finally, pursuant to Rule 608(b)(1), the NMS plan will be published for
public comment.\217\ Thus, all interested persons, including market
participants, regulatory authorities, and the general public, will have
an opportunity to provide meaningful comments on the details and costs
of the NMS plan submitted to the Commission, which the Commission will
review and consider.
---------------------------------------------------------------------------

    \213\ See CBOE Letter, p. 7.
    \214\ See Rule 613(a)(1)(xi).
    \215\ See Rule 613(b)(7)(i). Because members of the SROs will be
required to report data pursuant to the NMS plan, the Rule provides
that the plan must require that the Advisory Committee include
representatives of the member firms of the SROs. However, the
Commission believes that it is advisable for the SROs to consider
including other interested parties such as SIPs, vendors, investors,
and/or academics on the Advisory Committee. In addition, the
Commission expects that the Advisory Committee would include the
Commission's Chief Technology Officer as an observer. See Section
III.B.3.b., infra.
    \216\ See Rule 613(b)(7).
    \217\ 17 CFR 242.608(b)(1).
---------------------------------------------------------------------------

    In response to the commenter that believed that the objectives of
the consolidated audit trail could be achieved ``with a `few tweaks' to
the existing trade reports and by extending OATS,'' \218\ the
Commission notes, as described above, that existing trade reports and
the current OATS process combined do not meet many of the requirements
the Commission believes are essential for a consolidated audit trail.
The Commission therefore believes that an NMS plan, as noted above,
provides an effective mechanism for the SROs to create, implement, and
maintain a consolidated audit trail meeting such requirements. However,
it also notes that the adopted Rule does not preclude the
infrastructure, nomenclature, format, or any other aspects of an
existing order audit trail system, such as OATS, from being used for
the consolidated audit trail, provided the NMS plan proposing to
establish such an audit trail otherwise meets the requirements of Rule
613. The Commission stresses that existing order audit trails lack
critical information such as the identity of the customer, data on
principal orders or quotes, and a way to link orders across markets--
information that the Commission believes is essential to the
consolidated audit trail.\219\
---------------------------------------------------------------------------

    \218\ See Angel Letter, p. 3.
    \219\ See Section II.A., supra. The Commission notes that, in
the Proposing Release, it used the term ``proprietary orders'' to
describe orders that were generated for the account of a broker-
dealer. See Proposing Release, supra note 4, at 32570.
    To avoid confusion with the proposed ``Volcker Rule,'' which
proposes new regulations with respect to ``proprietary'' trading by
commercial banks and their affiliates, the Commission is using the
term ``principal orders'' in this Release to describe orders that
were generated for the account of a broker-dealer. See Securities
Exchange Act Release No. 65545 (October 12, 2011), 76 FR 68846
(November 7, 2011) (File No. S7-41-11).

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

B. Elements of the NMS Plan

    As discussed above, the adopted Rule requires the SROs to submit an
NMS plan to create, implement, and maintain a consolidated audit
trail.\220\ As adopted, the Rule permits the SROs to consider a wider
array of solutions, in creating, implementing, and maintaining a
consolidated audit trail. The Rule, however, also sets forth certain
minimum requirements of the consolidated audit trail that must be
included in the NMS plan submitted by the SROs to the Commission for
its consideration. The Commission believes that it is important to set
forth certain minimum requirements to ensure that the consolidated
audit trail will be designed in a way that provides regulators with the
accurate, complete, accessible, and timely market activity data they
need for robust market oversight. The minimum audit trail requirements
that must be included in the NMS plan submitted by the SROs are
discussed below.
---------------------------------------------------------------------------

    \220\ See Section I., supra.
---------------------------------------------------------------------------

1. Recording and Reporting
a. Products and Transactions Covered
    As proposed, Rule 613 would have applied to secondary market
transactions in all NMS securities, which includes NMS stocks and
listed options.\221\ In the Proposing Release, the Commission also
addressed the possibility of expanding the scope of the consolidated
audit trail over time. Specifically, proposed Rule 613(i) would have
required the NMS plan to include a provision requiring each national
securities exchange and national securities association to jointly
provide to the Commission, within two months after effectiveness of the
NMS plan, a document outlining how such exchanges and associations
would propose to incorporate into the consolidated audit trail
information with respect to equity securities that are not NMS
securities, debt securities, primary market transactions in NMS stocks,
primary market transactions in equity securities that are not NMS
securities, and primary market transactions in debt securities. The
document also would have been required to identify which market
participants would be required to provide the additional data and to
include an implementation timeline and a cost estimate for including
such data in the consolidated audit trail.\222\ The Commission
requested comment on whether expanding the consolidated audit trail to
include the products and transactions specified above was an
appropriate approach to the eventual expansion of the consolidated
audit trail, and, if so, an appropriate and realistic timetable for
doing so.
---------------------------------------------------------------------------

    \221\ See proposed Rule 613(c)(5).
    \222\ The Commission notes that any expansion of the
consolidated audit trail to cover non-NMS securities would be
effectuated through notice and comment.
---------------------------------------------------------------------------

    Several commenters expressed opinions on the scope of the products
and transactions proposed to be covered by the Rule and how their
inclusion in the consolidated audit trail should be phased in under the
Rule.\223\ One commenter urged the Commission to consider including
additional asset classes in the scope of the products covered by the
Rule, and specifically questioned the value of the consolidated audit
trail without the inclusion of information on futures and other
derivatives.\224\
---------------------------------------------------------------------------

    \223\ See Liquidnet Letter, p. 2 (suggesting limiting the scope
of the first phase of audit trail implementation to end-of-day-
reporting to ensure that it can be completed in a timely and cost-
effective manner; this commenter also recommended that the first
phase apply the consolidated audit trail to all market participants,
not just the SROs, as proposed). See also FIF Letter, p. 7
(suggesting that the consolidated audit trail cover just NMS
stocks--then at a later date, all NMS securities, including
options); FINRA Proposal Letter, p. 5 (suggesting several phases of
expansion, beginning with NMS stocks and over-the-counter (``OTC'')
equity securities, and ultimately including standardized options,
fixed income securities, conventional options, and security-based
derivatives in the consolidated audit trail); SIFMA Letter, p. 16-17
(believing that OATS could form the basis for the consolidated audit
trail, stating that OATS should be modified to include non-Nasdaq-
listed securities, listed options, quotes, street side and exchange-
to-exchange routing and market making and recommending phasing in
NMS stocks first, then any additional data elements, then listed
options and, finally, non-NMS securities); FIF Letter II, p. 2
(suggesting that the consolidated audit trail have ``multi-
instrument capabilities, most importantly options and futures but
also fixed income and other instruments).
    \224\ See Broadridge Letter, p. 4.
---------------------------------------------------------------------------

    The Commission also received comment on the proposed Rule's
approach for considering a possible future expansion of the products
and transactions covered by the consolidated audit trail. One commenter
believed that its technology would allow development of a platform that
would support multiple asset classes and expansion of the consolidated
audit trail for use by other regulators.\225\ Other commenters
expressed general support for expanding the scope of products
covered.\226\ One specifically suggested expanding the scope of the
Rule, for example, to include the ``creation of instruments that
underlie the securities that make up [mortgage-backed securities] and
[asset-backed securities].'' \227\ Another suggested expanding the
consolidated audit trail to all securities submitted to an exchange or
clearing agency.\228\ Yet another commenter, however, argued against
allowing the exchanges, through the NMS plan, to have primary
responsibility for specifying the data requirements of non-exchange-
traded asset classes, stating that exchanges lacked experience with
these instruments.\229\
---------------------------------------------------------------------------

    \225\ See Nasdaq Letter II, p. 3.
    \226\ See Liquidnet Letter, p. 2; FINRA Proposal Letter, p. 5;
SIFMA Letter, p. 16-17; Marketcore Letter, p. 1.
    \227\ See Marketcore Letter, p. 1.
    \228\ See Ameritrade Letter, p. 3. See also Mansfield Letter, p.
1 (suggesting other data, including ``metrics'' and ``market
environmental information'' to be included in the consolidated audit
trail).
    \229\ See Direct Edge Letter, p. 4.
---------------------------------------------------------------------------

    The Commission has considered the comments discussed above and is
adopting the Rule as proposed with respect to the scope of the
securities that must be covered at this time, but, as described below,
acknowledges the importance of a mechanism for considering other types
of products in the future. Specifically, the adopted Rule requires that
consolidated audit trail data be collected for all NMS securities.\230\
However, the Commission also is adopting the requirement that the NMS
plan require the SROs to jointly submit a document outlining a possible
plan for expansion of the consolidated audit trail, as proposed, but
with three modifications from the proposed Rule.
---------------------------------------------------------------------------

    \230\ See Proposing Release, supra note 4, at 32568-70; Rule
613(c)(5).
---------------------------------------------------------------------------

    Rule 613(i) requires that the SROs jointly provide the Commission a
document outlining how the SROs could incorporate the following
additional products into the consolidated audit trail: Equity
securities that are not NMS securities, debt securities, primary market
transactions in equity securities that are not NMS securities, and
primary market transactions in debt securities (``expansion
document''). The adopted Rule also requires the expansion document to
include details for each order and reportable event that may be
required to be provided, which market participants may be required to
provide the data, an implementation timeline and a cost estimate. The
first modification from the proposed Rule is a technical change
clarifying that Rule 613(i) is requiring the SROs to provide

the Commission with a document that outlines how an expansion of the
consolidated audit trail could be accomplished in the future and is
not, at this time, requiring that the SROs commit to expanding the
consolidated audit trail beyond secondary market transactions in NMS
securities.\231\ However, the Commission notes that Rule 613(i) retains
the requirement that SROs include an implementation timeline and a cost
estimate; in this regard, the Commission expects that the SROs will
address fully in the expansion document how any such expansion of the
consolidated audit trail could be implemented in practice, and that
such document would include sufficient detail for the Commission to
ascertain how the SROs could proceed with such expansion. The
Commission would expect to make the expansion document publicly
available on its Web site and to solicit a wide range of comment on it
to further inform and facilitate the expansion of the consolidated
audit trail if appropriate, taking into account the relevant
considerations contemplated by Rule 613(a)(1). In addition, the
expansion document could inform the detailed plans that are to be
prepared at least every two years by the CCO of the NMS plan.\232\
---------------------------------------------------------------------------

    \231\ See Rule 613(i). Specifically, Rule 613(i) now provides
that the SROs provide a document outlining how such exchanges and
associations ``could'' incorporate non-NMS securities into the
consolidated audit trail, rather than how the exchanges and
associations ``would propose to'' incorporate non-NMS securities;
and that the exchanges and associations should provide details for
each order and reportable event that ``may'' be required to be
provided, and which market participants ``may'' be required to
provide the data. As proposed, the comparable provision of Rule
613(i) required that the exchanges and associations should provide
details for each order and reportable event that ``would'' be
required to be provided, and which market participants ``would'' be
required to provide the data.
    \232\ See Section III.B.3.b., infra.
---------------------------------------------------------------------------

    In addition, after considering the comments received relating to
the potential expansion of the consolidated audit trail and how such an
expansion might occur,\233\ the Commission is making the second
modification to the proposed Rule to extend the deadline for submitting
the expansion document from two months to six months from the date of
effectiveness of the NMS plan approved by the Commission. The
Commission believes that the additional four months will provide the
time necessary after the approval of the NMS plan by the Commission for
the SROs to consider how they might expand the consolidated audit trail
to capture orders and trading in these additional securities and thus
will aid the Commission in receiving an outline or plan from the
exchanges and associations that has had the benefit of additional time
for analysis and planning. Finally, given the extension of the deadline
for submitting the expansion document and the importance of information
regarding primary market information in NMS stocks relative to other
types of transactions as discussed in Section III.B.1.a. below, the
Commission is removing the requirement that the expansion document
discuss all primary market transactions in NMS stocks and is, instead,
as discussed later, requiring that a discussion of the feasibility,
benefits, and costs of incorporating into the consolidated audit trail
information about allocations in primary market transactions in NMS
securities be addressed with the NMS plan submission.\234\ However, the
expansion document must still include a discussion of primary market
transactions in equity securities that are not NMS securities.
---------------------------------------------------------------------------

    \233\ See Ameritrade Letter, p. 3; Liquidnet Letter, p. 2;
Marketcore Letter, p. 1; FINRA Proposal Letter, p. 5; SIFMA Letter,
p. 16-17.
    \234\ See Rule 613(a)(1)(vi). See also Section III.C.2.a.i.,
infra.
---------------------------------------------------------------------------

    The Commission agrees in principle with the commenters that
advocated a phased approach to implementation.\235\ The Commission,
however, has determined not to modify the proposed scope of the Rule,
which applies to orders in NMS securities. The Commission also adopts
substantially its proposed implementation timeframes that apply if and
when the NMS plan is approved,\236\ except that the NMS plan may
provide up to one additional year before small broker-dealers will be
required to provide information to the central repository.\237\
---------------------------------------------------------------------------

    \235\ See note 222, supra.
    \236\ See Rule 613(a)(3), which states that the NMS plan must
require the plan sponsors: (i) Within two months after effectiveness
of the NMS plan to select a plan processor; (ii) within four months
after effectiveness of the NMS plan to synchronize their business
clocks and require the members of each such exchange and association
to synchronize their business clocks; (iii) within one year after
effectiveness of the NMS plan to provide to the central repository
the data specified in Rule 613(c); (iv) within fourteen months after
effectiveness of the NMS plan to implement a new or enhanced
surveillance system(s) as required by Rule 613(f); (v) within two
years after effectiveness of the NMS plan to require their members,
except those members that qualify as small broker-dealers as defined
in Sec.  240.0-10(c), to provide to the central repository the data
specified in Rule 613(c); and (vi) within three years after
effectiveness of the NMS plan to require their members that qualify
as small broker-dealers as defined in Sec.  240.0- 0(c) to provide
to the central repository the data specified in Rule 613(c).
    \237\ See Section III.D., infra.
---------------------------------------------------------------------------

    The Commission continues to believe that the Rule's requirement to
include secondary market transactions in all NMS securities (i.e., both
listed equities and options) is a reasonable first step in the
implementation of the consolidated audit trail. In addition, the
Commission believes that applying the Rule solely to NMS securities
should allow for a less burdensome implementation of the consolidated
audit trail as compared to applying the Rule to a broader set of
securities,\238\ in large part because market participants already have
experience with audit trails for transactions in these securities. And,
as discussed in detail above,\239\ there are many significant benefits
of a consolidated audit trail that includes NMS securities (even if it
is only limited to NMS securities).
---------------------------------------------------------------------------

    \238\ The Commission also believes that limiting the application
of the Rule initially to only NMS securities should help ensure that
the implementation schedule prescribed by the Rule is achievable.
See Section III.D., infra.
    \239\ See Section II.A.2, supra.
---------------------------------------------------------------------------

    With regards to a phased approach to implementation, the Commission
notes that the data recording and reporting requirements would apply
initially, as proposed, to the SROs but not to their members. This will
allow members additional time to, among other things, implement the
systems and other changes necessary to provide the required information
to the central repository, including capturing customer and order
information that they may not have previously been required to collect.
Should the SROs determine that additional implementation phases might
be appropriate (e.g., applying the Rule first to equities and then to
listed options), the Commission notes that the Rule does not preclude
the SROs from proposing such phases, so long as the outer time
parameters specified in the Rule, which the Commission is adopting as
proposed, are met.\240\
---------------------------------------------------------------------------

    \240\ See note 223, supra.
---------------------------------------------------------------------------

    The Commission agrees with commenters that the inclusion of
additional products (even at a later date) could further enhance the
ability of the SROs and the Commission to conduct effective market
oversight for financial products currently trading in the
marketplace.\241\ The Commission also

believes that it could be beneficial for the consolidated audit trail
to be expanded over a reasonable period of time to include information
on primary market transactions in equity and debt securities, as this
data could be used to quickly assess potential violations of various
rules under the Exchange Act such as, for example, Regulation M and
Rule 10b-5.\242\ For example, the primary market transaction data would
allow regulators to more quickly identify whether any participant in an
offering sold short prior to the offering in violation of Regulation M.
The primary market transaction data would allow for identification of
the cost basis for purchases by intermediaries and make it easier to
assess whether subsequent mark-ups to investors in primary offerings
are fair and reasonable and, if not, whether there has been a violation
of the antifraud provisions of the federal securities laws, including
Rule 10b-5.
---------------------------------------------------------------------------

    \241\ The Commission notes that the financial markets have
become increasingly interrelated, with transactions occurring in the
futures markets affecting transactions in the securities markets. To
the extent that instruments other than NMS securities (e.g., futures
on a securities index or security-based swaps) can be substitutes
for trading in NMS securities, or are otherwise linked to such
trading (e.g., as part of a strategy that involves multiple
products), having access to an audit trail that includes these
instruments would improve regulators' ability to more quickly detect
potentially manipulative or other illegal activity that could occur
across markets. The Commission recognizes, however, that any such
expansion to include products not under the Commission's
jurisdiction, and thus not contemplated by this Rule, would need to
be coordinated with the CFTC or other applicable regulatory
authorities, and would likely require a separate rulemaking, which
would include a consideration of the costs and benefits of such an
expansion. In this regard, the Commission believes that it could be
beneficial to discuss with the CFTC, at the appropriate time, the
possibility of including within the consolidated audit trail data
relating to futures or swap products regulated by the CFTC that are
based on securities. The Commission is therefore directing the
Commission staff to work with the SROs, the CFTC staff, and other
regulators and market participants to determine how other asset
classes, such as futures, might be added to the consolidated audit
trail. The information from such an expanded consolidated audit
trail could benefit both the CFTC and the Commission.
    An example of a non-NMS security is a security-based swap. The
Commission notes that, separately, it has proposed rules requiring
the reporting of security-based swap information to registered
security-based swap data repositories (``SDR'') or the Commission.
See Securities Exchange Act Release No. 63446, File No. S7-34-10
(November 19, 2010), 75 FR 75208 (December 2, 2010) (proposing
Regulation SBSR under the Exchange Act providing for the reporting
of security-based swap information to registered security-based SDR
or the Commission, and the public dissemination of security-based
swap transaction, volume, and pricing information); see also
Securities Exchange Act Release No. 63447, File No. S7-35-10
(November 19, 2010), 75 FR 77306 (December 10, 2010) (proposing
rules governing the SDR registration process, duties, and core
principles).
    \242\ See 17 CFR 242.100 et seq.; 17 CFR 240.10b-5. Rule 105 of
Regulation M prohibits the short selling of equity securities that
are the subject of a public offering for cash and the subsequent
purchase of the offered securities from an underwriter or broker or
dealer participating in the offering if the short sale was effected
during a period that is the shorter of the following: (i) Beginning
five business days before the pricing of the offered securities and
ending with such pricing; or (ii) beginning with the initial filing
of such registration statement or notification on Form 1-A or Form
1-E and ending with the pricing. Thus, Rule 105 prohibits any person
from selling short an equity security immediately prior to an
offering and purchasing the security by participating in the
offering.
    Rule 10b-5 provides that ``[i]t shall be unlawful for any
person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce, or of the mails or of any
facility of any national securities exchange, (a) [t]o employ any
device, scheme, or artifice to defraud, (b) [t]o make any untrue
statement of a material fact or to omit to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading, or (c)
[t]o engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person, in
connection with the purchase or sale of any security.''
---------------------------------------------------------------------------

    The Commission considered the comment letter that agreed that
``policing the market requires a comprehensive approach'' but asserted
the exchanges should not be primarily responsible for specifying
requirements relating to asset-backed securities and other debt
instruments, including swap instruments that are not exchange-
traded.\243\ In response, the Commission notes the Rule requires the
SROs to submit a document outlining a plan for the possible expansion
of the NMS plan to non-NMS securities--namely debt securities and
equity securities that are not NMS securities.\244\ The Commission also
notes that FINRA, the SRO responsible for oversight of trading in the
over-the-counter market, would participate in the preparation of such
expansion document, and expects that FINRA would provide substantial
input as to how the consolidated audit trail might be expanded to
include non-NMS securities. Because the consolidated audit trail will
be jointly owned and operated by the SROs pursuant to the NMS plan,
however, the Commission believes that the involvement of all of the
SROs in any potential expansion process is appropriate.
---------------------------------------------------------------------------

    \243\ See Direct Edge Letter, p. 4.
    \244\ See Rule 613(i).
---------------------------------------------------------------------------

    The Commission also notes that any expansion of the consolidated
audit trail to include transactions in non-NMS securities would be
effected through public notice and comment, and take into account the
relevant considerations contemplated by Rule 613(a)(1). Furthermore,
adopted Rule 613(b)(7), discussed in more detail later in this
Release,\245\ requires the NMS plan to include an Advisory Committee,
which includes members of the plan sponsors and other interested
parties as set by the NMS plan,\246\ that would be available to provide
consultation on matters concerning the central repository, including
the securities subject to the Rule. Therefore, the Commission believes
that the participation of FINRA, the public, and the Advisory Committee
should assist the SROs in devising a document outlining the expansion
of the consolidated audit trail to other securities.
---------------------------------------------------------------------------

    \245\ See Section III.B.3.b., infra.
    \246\ See note 2145, supra.
---------------------------------------------------------------------------

    The Commission continues to believe that the expansion document
required by Rule 613(i) will provide valuable information to the
Commission and help inform the Commission about the likely efficacy of
expanding the scope of the consolidated audit trail to include
information on equity securities that are not NMS securities, debt
securities, primary market transactions in equity securities that are
not NMS securities, and primary market transactions in debt securities.
In addition, the expansion document will aid the Commission in
assessing the feasibility and impact of the plan sponsors' proposed
approach.
    The Commission acknowledges that plan sponsors will incur costs to
prepare the expansion document. For example, plan sponsors will be
required to address, among other things, details for each order and
reportable event for which data may be submitted; which market
participants may be required to provide the data; an implementation
timeline; and a cost estimate. Thus, the plan sponsors must, among
other things, undertake an analysis of technological and computer
system acquisitions and upgrades that would be required to incorporate
such an expansion. The Commission, however, believes that it would be
beneficial to receive a document outlining how the plan sponsors could
incorporate into the consolidated audit trail securities in addition to
NMS securities, such as over-the-counter equity and debt securities, as
soon as practicable. This is because such an expansion document will
aid the Commission in assessing both the feasibility of expanding the
audit trail to these additional securities, possibly including, as
commenters urged, instruments that underlie mortgage-backed securities
and asset-backed securities, and the resulting potential benefits to
the securities markets as a whole if the consolidated audit trail is
expanded in the manner described in the document submitted by the plan
sponsors pursuant to Rule 613(i).
b. Orders and Quotations
    As proposed, Rule 613 would have required 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. Proposed
Rule 613(j)(4) would have defined ``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.\247\ In sum, the Commission
proposed that the Rule cover all orders (whether for a customer or for
a member's own account), as well as quotations in NMS stocks and listed
options.\248\
---------------------------------------------------------------------------

    \247\ See Proposing Release, supra note 4, at 32570; proposed
Rule 613(j)(4).
    \248\ Id.
---------------------------------------------------------------------------

    The Commission requested comment about the scope of its proposed
definition of ``order,'' including whether principal orders \249\
should be included in the scope of the consolidated audit trail and
whether there are 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. The Commission
also requested comment on whether non-firm quotations should be
included in the consolidated audit trail and marked to show that they
are not firm.\250\
---------------------------------------------------------------------------

    \249\ See note 219, supra.
    \250\ See Proposing Release, supra note 4, at 32571.
---------------------------------------------------------------------------

    Commenters generally supported the inclusion of principal orders in
the definition of ``order,'' \251\ but some expressed concern about
including market maker quotations in the consolidated audit trail.\252\
In particular, these commenters thought that the volume of quotes
proposed to be collected was so large that it would require market
participants to increase the capacity of their systems that would
transmit data to the central repository, and thus recommended that
market maker quotations be exempted from the Rule's reporting
requirements.\253\ One of these commenters specifically suggested that
the Rule use the same approach as is currently used for the COATS--
which contains order, quote (but only the top of market quote) and
transaction data for all market participants.\254\
---------------------------------------------------------------------------

    \251\ See FINRA Letter, p. 10; SIFMA Letter, p. 15; Liquidnet
Letter, p. 3; FINRA Proposal Letter, p. 6.
    \252\ See SIFMA Letter, p. 13; CBOE Letter, p. 5.
    \253\ See SIFMA Letter, p. 13; CBOE Letter, p. 5.
    \254\ See CBOE Letter, p. 5. See also Options Settlement Order,
supra, note 60. See, e.g., Securities Exchange Act Release No. 50996
(January 7, 2005), 70 FR 2436 (order approving proposed rule change
by CBOE relating to Phase V of COATS).
---------------------------------------------------------------------------

    The Commission also received two comments regarding the inclusion
of non-firm orders and quotes in the consolidated audit trail. One
commenter, consistent with the proposed Rule, stated that only firm
orders and quotes should be included.\255\ Another commenter, however,
believed that the proposed Rule did not go far enough, and stated that
the Rule should require that information relating to indications of
interest or similar communications be reported to, among other things,
assist the SROs and the Commission in detecting ``spoofing,'' \256\
where a market participant enters and quickly cancels limit orders or
quotations with the intent of having those non-bona fide orders or
quotations change the NBBO or create a misperception of the available
market liquidity to induce others to change their trading decisions.
---------------------------------------------------------------------------

    \255\ See Liquidnet Letter, p. 3.
    \256\ See Ameritrade Letter, p. 3.
---------------------------------------------------------------------------

    In addition to the comments regarding inclusion of principal and
non-firm orders and quotes in the consolidated audit trail, some
commenters suggested ways to narrow the definition of ``order.'' One
commenter would exempt ``non-trading transfers of securities within a
legal entity, such as internal journals of securities within a desk or
aggregation unit,'' from the mandatory reporting requirements.\257\
Another commenter--an options exchange--recommended that the Commission
only require consolidated NBBO data to be reported with respect to
options quotations, noting that there are millions of quotes per day on
its exchange and that certain options, including out-of-the-money
options, are subject to a high volume of quotation updates but generate
limited trading activity.\258\
---------------------------------------------------------------------------

    \257\ See SIFMA Letter, p. 15.
    \258\ See BOX Letter, p. 3.
---------------------------------------------------------------------------

    The Commission considered the comments regarding the scope of the
quotes and orders that should be included in the Rule's definition of
``order,'' and acknowledges that costs will be incurred by SROs and
their members to record and report this information to the central
repository and by the central repository to receive, consolidate, store
and make accessible such information.\259\ The Commission also
acknowledges that requiring the recording and reporting of all quotes
and orders may entail more costs, such as additional development time
and storage capacity, than if the Commission did not require the
recording and reporting of market maker quotes or out-of-the-money
options. Nevertheless, because the Commission continues to believe that
many of the benefits of a consolidated audit trail can only be achieved
if all orders and quotations are included, the Commission is adopting
the definition of ``order'' in Rule 613(j)(4) (renumbered as Rule
613(j)(8)), as proposed, to include orders received by a member of an
exchange or FINRA from any person, any order originated by a member of
an exchange or FINRA, and any bid or offer, including principal
orders.\260\
---------------------------------------------------------------------------

    \259\ Such costs might include the costs to purchase or build
new systems and/or costs to modify existing systems to record and
report the required data. As discussed in Section I., supra, the NMS
plan would include detailed information about costs for the public
and the Commission to consider.
    \260\ See Rule 613(j)(4).
---------------------------------------------------------------------------

    The Commission believes it is important for the consolidated audit
trail to capture information for all principal orders and market maker
quotations because principal orders and market maker quotations
represent a significant amount of order and transaction activity in the
U.S. markets. Effective surveillance of their trading is critical to
detecting a variety of types of potential misconduct such as
manipulation and trading ahead. By providing regulators comprehensive
information about principal orders and market maker quotations
throughout the U.S. markets--information that is not available to
regulators today using existing audit trails--the consolidated audit
trail would allow regulators to efficiently surveil for manipulative
and other illegal activity by market making and other proprietary
trading firms. In addition, any comprehensive market reconstruction or
other market analysis would need to take into account principal orders
and market maker quotations--which, as noted above, constitute a large
percentage of the orders and trades in today's markets--to provide a
complete and accurate picture of market activity.
    Furthermore, the Commission believes that including principal
orders and market maker quotations in the consolidated audit trail
would permit SROs to more efficiently monitor the market for violations
of SRO rules. Such monitoring requires determination of the exact
sequence of the receipt and execution of customer orders in relation to
the origination and execution of principal orders or market maker
quotations. For example, SROs would be able to use the consolidated
audit trail data to more efficiently detect instances when a broker-
dealer receives a customer order and then sends a principal order or
quote update to an exchange ahead of the customer order, potentially
violating the trading ahead prohibitions in SRO rules.\261\
---------------------------------------------------------------------------

    \261\ See, e.g., FINRA Rule 5320; NYSE Arca Equities Rule 6.16.
---------------------------------------------------------------------------

    In addition, information on principal orders or market maker
quotations could

be useful in investigating illegal ``spoofing.'' The availability to
regulators of comprehensive information about principal orders and
market maker quotations would allow them to more efficiently and
effectively identify the source of the orders or quotations and, thus,
better determine whether the quoted price was manipulated or simply a
response to market forces.
    A further example where information on principal orders and market
maker quotations would enhance regulatory efforts is in reviewing
``layering'' or other manipulative activity. Layering is a form of
market manipulation 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. Layering attempts to manipulate the shape
of the limit order book to move the price of a security or influence
the trading decisions of others. Layering is often effected with
principal orders, so inclusion of principal orders in the consolidated
audit trail would aid regulators in the detection of this manipulative
practice.\262\
---------------------------------------------------------------------------

    \262\ See Section II.A., supra.
---------------------------------------------------------------------------

    The Commission considered the comment that recommended excluding
certain quotations, such as those generated for out-of-the-money
options, from the definition of ``orders'' required to be reported to
the central repository.\263\ The Commission, however, believes that
such quotations must be included in the consolidated audit trail.
Although there may be a high volume of quotations in out-of-the-money
options with limited resulting trading activity, the Commission
believes that having a record of those quotations is necessary to allow
regulators to surveil high-speed quoting strategies for manipulative or
other illegal behavior and to assess the impact of market making and
other high-frequency quoting behaviors on the quality of the markets.
Including these quotations is necessary for example, because the
Commission may investigate allegations of a broker-dealer engaging in
the practice of flooding the market with out-of-the-money option
quotations for the purpose of manipulating the price of the option or
related security, or to overload exchange execution systems. Based on
the foregoing, to ascertain whether any illegal activity might be
occurring through the misuse of quoting, the consolidated audit trail
must require all bids and offers to be collected and reported to the
central repository.
---------------------------------------------------------------------------

    \263\ See BOX Letter, p. 3.
---------------------------------------------------------------------------

    The Commission also considered the comment that asserted that
``non-trading transfers of securities within a legal entity, such as
internal journals of securities within a desk or aggregation unit''
should be exempt from the reporting requirements of the Rule.\264\ In
response to this comment, the Commission notes that Rule 613 does not
require the reporting of such transfers because they are not
``orders,'' as defined under Rule 613(j)(8). However, Rule 613 does
require the NMS plan to require the reporting of the internal routing
of orders at broker-dealers.\265\
---------------------------------------------------------------------------

    \264\ See SIFMA Letter, p. 15.
    \265\ See Rule 613(c)(7)(ii)(F). The Commission notes that the
NMS plan submitted by the plan sponsors would need to provide
appropriate detail as to how orders routed within a single broker-
dealer would be reported. For example, the NMS plan would need to
address the routing of an order received by a customer-facing sales
desk within a broker-dealer to a separate trading or market-making
desk within the same broker-dealer that actually determines how to
execute the order.
---------------------------------------------------------------------------

    The Commission also considered the comment that recommended
including indications of interest in the definition of ``order.'' \266\
The Commission, however, is not including indications of interest in
the definition of ``order'' for purposes of the consolidated audit
trail because the Commission believes that the utility of the
information such data would provide to regulators would not justify the
costs of reporting the information. Indications of interest are
different than orders because they are not firm offers to trade, but
are essentially invitations to negotiate. As such, the Commission
believes that indications of interest are less likely to be used as a
vehicle for illegal activity, such as manipulation or layering, because
they would be less likely to induce a response from other market
participants.
---------------------------------------------------------------------------

    \266\ See Ameritrade Letter, p. 3.
---------------------------------------------------------------------------

c. Persons Required To Report Information to the Central Repository
    Under proposed Rule 613(c)(5), each national securities exchange
and its members would have been required to collect and provide to the
central repository certain data for each NMS security registered or
listed on a national securities exchange, or admitted to unlisted
trading privileges on such exchange; and, under proposed Rule
613(c)(6), each national securities association and its members would
have been required to collect and provide to the central repository
certain data for each NMS security for which transaction reports would
be required to be submitted to a national securities association.
Proposed Rule 613(c)(7) would have required each national securities
exchange, national securities association, and any member of such
exchange or association to collect and provide to the central
repository certain details, delineated in such Rule, for each order and
each reportable event. The Commission requested comment on whether
requiring SROs and their members to report the required order
information to the central repository was appropriate.
    Several commenters broadly objected to the requirement that all
broker-dealers report consolidated audit trail information to the
central repository and/or proposed alternatives to such a
requirement.\267\ One commenter suggested that introducing brokers
should be permitted to rely on their clearing firms for reporting to
the central repository, arguing that requiring separate reporting by
introducing brokers and clearing firms ``will only dilute the economic
benefits realized by Introducing Brokers through such clearing
arrangements and may result in increased costs to customers.''\268\
This commenter also stated that it does not believe there is
appreciable benefit to the Commission, FINRA or the markets in general
in mandating reporting by introducing brokers.\269\
---------------------------------------------------------------------------

    \267\ See CBOE Letter, p. 5; TIAA-CREF Letter, p. 2; Wachtel
Letter, p. 1; SIFMA Letter p. 13; FINRA Proposal Letter, p. 5-6;
GETCO Letter, p. 3-4; Nasdaq Letter II, p. 3.
    \268\ See TIAA-CREF letter, p. 2-3. Another commenter echoed
this concern and recommended that the consolidated audit trail
develop a means to avoid such duplicative reporting, explaining that
this is a problem with the current OATS system. See Wells Fargo
Letter, p. 2.
    \269\ See TIAA-CREF letter, p. 2.
---------------------------------------------------------------------------

    Similarly, another commenter urged the Commission to exclude
broker-dealers from the consolidated audit trail reporting requirements
if they route their orders exclusively to another reporting firm that
is solely responsible for further routing decisions, on the basis that
this would essentially result in duplicative reporting.\270\ In
addition, this commenter recommended the Commission exempt small
broker-dealers from the reporting requirements if compliance would be
unduly burdensome.\271\ Another commenter, a small broker-dealer that
manually handles orders, specifically suggested that the Commission
adopt a provision similar to FINRA Rule 7470, which provides FINRA
staff the authority to grant exemptions to broker-dealers that solely
handle orders manually from

OATS recording and data transmission requirements.\272\
---------------------------------------------------------------------------

    \270\ See FINRA Proposal Letter, p. 5-6.
    \271\ Id.
    \272\ See Wachtel Letter, p. 1. The Commission notes any
exemptions granted by FINRA under FINRA Rule 7470 may not exceed a
period of two years, unless extended. See FINRA Rule 7470. FINRA's
authority to grant exemptions under FINRA Rule 7470 expires on July
10, 2015. See FINRA Rule 7470(c).
---------------------------------------------------------------------------

    Three commenters argued that broker-dealers should not be required
to report quotation information to the central repository that is
available from other market participants.\273\ Specifically, one
commenter argued that broker-dealers should not be required to report
information to the central repository that has already been reported to
an SRO (e.g., market maker quotes) because the SRO would also be
reporting the information to the central repository.\274\ Another
commenter stated that it ``believes that, rather than requiring quote
reporting by broker-dealers, only the exchanges and FINRA (through its
Alternative Display Facility and proposed Quotation Consolidation
Facility) should be required to report quotations,'' and added that
``[t]he exchanges and FINRA are in a position to provide quotation
information at a lower cost and with more accuracy.'' \275\ Similarly,
a third commenter urged the Commission to consider ``whether
surveillance systems could rely on quotation information disseminated
by the SROs,'' instead of requiring all quotation data to be sent
separately to the repository.\276\
---------------------------------------------------------------------------

    \273\ See CBOE Letter, p. 5-6; SIFMA Letter, p. 13; GETCO
Letter, p. 3-4.
    \274\ See CBOE Letter, p. 5-6 (stating its belief that ``it
would be redundant for both the market makers and the exchanges to
all submit this information to the CAT. We recommend that the
exchanges be permitted to submit information on market maker quotes
to the CAT. Market makers who submit quotes to an exchange would
have no obligation other than to correctly identify themselves to
the exchange as the party submitting the quotation. The exchange
could add the rest of the required information (participant
identifier, unique order identifier, etc.) to the quote and transmit
it to the CAT'').
    \275\ See SIFMA Letter, p. 13.
    \276\ See GETCO Letter, p. 3-4. Another commenter proposed to
develop a platform that would collect audit trail information from
the SROs and other sources of information, and thus reduce the
obligations on broker-dealers to report data. See Nasdaq Letter II,
p. 3.
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    The Commission considered the comments objecting to the requirement
that broker-dealers report all consolidated audit trail information to
the central repository. However, for the reasons discussed below, the
Commission is adopting the requirements as proposed with regard to the
obligation of members to report required data to the central
repository.\277\ Specifically, the Commission is adopting Rules
613(c)(5) and (6) as proposed. Rule 613(c)(5) provides that ``[t]he
national market system plan submitted pursuant to this section shall
require each national securities exchange and its members to record and
report to the central repository the information required by [Rule
613(c)(7)] for each NMS security registered or listed for trading on
such exchange or admitted to unlisted trading privileges on such
exchange,'' and Rule 613(c)(6) provides that ``[t]he national market
system plan submitted pursuant to this section shall require each
national securities association and its members to record and report to
the central repository the information required by paragraph (c)(7) of
this section for each NMS security for which transaction reports are
required to be submitted to the association.''
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    \277\ See Rules 613(c)(5) through (7).
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    In essence, the Commission believes these provisions are
appropriate because they require each party--whether a broker-dealer,
exchange or ATS--that takes an action with respect to an order, and
thus has the best information with respect to that action, to record
and report \278\ that information to the central repository.\279\ For
example, the broker-dealer originating an order--whether received from
a customer or generated as a principal order--is in the best position
to record the terms of that order, including the time of origination,
as well as the unique customer and order identifiers. If the
originating broker-dealer is required to record the time each order in
a rapid series of principal orders is generated, for example,
regulators will be able to more accurately reconstruct the sequence of
those orders for purposes of conducting market surveillances for
manipulative or other illegal activity, or for performing market
reconstructions. In addition, requiring the originating broker-dealer
to record the time an order was received from a customer could then
help regulators more accurately determine whether the broker-dealer
quickly traded ahead of the customer order. On the other hand, if the
recording and reporting requirements initially applied only to the
executing or routing broker-dealer, or the exchange in the case of
market maker quoting, regulators would not know the precise time the
order or quote was originated, and would not be able to implement or
perform as efficiently effective surveillances, such as those discussed
above. In addition, the lack of precise order origination time could
interfere with the ability of regulators to perform accurate market
reconstructions or analyses, particularly with respect to high
frequency trading strategies. Thus, the Commission believes that every
broker-dealer (and exchange) that touches an order must record the
required data with respect to actions it takes on the order,
contemporaneously with the reportable event, to ensure that all
relevant information, including the time the event occurred, is
accurately captured and reported to the consolidated audit trail.\280\
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    \278\ The Commission notes that the Rule does not preclude the
NMS plan from allowing broker-dealers to use a third party to report
the data required to the central repository on their behalf. In
particular, the Commission recognizes that introducing brokers may
wish to contract with clearing broker-dealers for this purpose and
that the SROs may need to amend their rules to address the
allocation of responsibility between the parties. In such cases, the
Commission expects that the clearing contract, as mandated by the
SRO's rules, as amended, would address the allocation of
responsibility for the reporting of required data.
    \279\ The Commission has adopted Rule 613(c)(5) and (6) using
the terms ``record'' and ``report'' the required audit trail data,
rather than ``collect'' and ``provide'' the required audit trail
data, as proposed. See also Section III.B.1.e., infra.
    \280\ The Rule as adopted requires the NMS plan submitted to the
Commission for its consideration to require broker-dealers and SROs
to record and report to a central repository only the audit trail
information for actions each took with respect to an order. For
example, if a member receives an order from a customer, the member
will be required to report its receipt of that order (with the
required information) to the central repository. If the member then
routes the order to an exchange for execution, the member will be
required to report the routing of that order (with the required
information) to the central repository. Likewise, the exchange
receiving the routed order will be required to report the receipt of
that order from the member (with the required information) to the
central repository. If the exchange executes the order on its
trading system, the exchange will be required to report that
execution of the order (with the required information) to the
central repository, but the member will not also be required to
report the execution of the order. If the member executes the order
in the OTC market, however, rather than routing the order to an
exchange (or other market center) for execution, the member will be
required to report the execution of the order (with the required
information) to the central repository. In this regard, there is no
duplicative reporting of audit trail information because each market
participant is required to report only the audit trail data for the
actions it has taken with respect to an order.
    The Commission notes that, for orders that are modified or
cancelled, Rule 613(c)(7)(iv) would require the broker-dealer who
received the modification from a customer, for example, to report
the order modification to the central repository. Thus, if broker-
dealer A received a modification to a customer's order from the
customer, broker-dealer A would be required to report such
modification to the central repository. If broker-dealer A had
already routed the customer's order to another broker-dealer
(``broker-dealer B''), the customer's modification would also need
to be reported by broker-dealer A to broker-dealer B. The receipt of
the customer's modification by broker-dealer B would also need to be
reported to the central repository, pursuant to Rule 613(c)(7)(iv).
The same reporting obligations would apply if the modification were
originated by broker-dealer A.
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    While a broker-dealer will be required to record any actions it
takes with

respect to an order because such recordation would capture information,
particularly the time stamp, which is needed by regulators for the
reasons discussed above, the Commission notes that nothing in the Rule
precludes the NMS plan submitted to the Commission for its
consideration from allowing an introducing broker or other broker-
dealer to use a third party, such as a clearing broker-dealer, to
report the data recorded by the introducing broker or other broker-
dealer to the central repository.
    The Commission acknowledges that SROs and their members will incur
costs to record and report the audit trail data required by Rules
613(c)(5), 613(c)(6) and 613(c)(7).\281\ The Commission also
acknowledges that, in some instances, the information required to be
recorded and reported by some market participants, for example, market
makers, may indeed be available from other market participants (in the
case of market makers, the exchanges) and that there might be
additional costs for all market participants to record and report
information. However, for the reasons noted above, the Commission
believes that requiring every market participant that touches an order
to record and report the required audit trail data to the central
repository, and thus requiring these market participants to incur these
costs is appropriate. The Commission believes that such costs will
depend on the exact details of how information is to be recorded and
reported to the central repository, including whether third-parties,
such as clearing-brokers or exchanges, facilitate the transmission of
such data. But because these costs depend on details that are not being
prescribed by the Commission, Rule 613 requires that the SROs must, in
their proposal of the specific mechanisms by which data will be
reported to the central repository, include cost estimates of their
solution, as well as a discussion of the costs and benefits of the
various alternatives considered but not chosen.\282\ More so, as
discussed above in Section I, once the Commission receives the
submitted NMS plan, it will be able to use such plan-specific details
and costs estimates, as well as public comment on the NMS plan, in
determining whether to approve the NMS plan.
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    \281\ Such costs might include the costs to purchase or build
new systems and/or costs to modify existing systems to record and
report the required data. As discussed in Section I., supra, the NMS
plan would include detailed information about costs for the public
and the Commission to consider.
    \282\ See Section III.C.2.iii., infra.
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    The Commission also considered the comment that small broker-
dealers should be granted an exemption from the Rule,\283\ and, as
discussed in Section III.D., is adopting Rule 613(a)(3)(vi), which
provides that the NMS plan shall require each SRO to require small
broker-dealers to provide audit trail data to the central repository
within three years after effectiveness of the NMS plan, as opposed to
within two years as proposed.\284\ The Commission believes that
completely exempting small broker-dealers from reporting requirements
would be contradictory to the goal of Rule 613, which is to create a
comprehensive audit trail. In effect, an exemption to small broker-
dealers from the requirements of the Rule would eliminate the
collection of audit trail information from a segment of the broker-
dealer community and would thus result in an audit trail that does not
capture all orders by all participants in the securities markets for
NMS securities. The Commission notes that illegal activity, such as
insider trading and market manipulation, can be conducted through
accounts at small broker-dealers just as readily as it can be conducted
through accounts at large broker-dealers. In addition, granting an
exemption to certain broker-dealers might create incentives for
prospective wrongdoers to utilize such firms to evade effective
regulatory oversight through the consolidated audit trail. The
Commission recognizes, however, that small broker-dealers, particularly
those that operate manual systems, might be particularly impacted
because of their more modest financial resources and may need
additional time to upgrade to an electronic method of reporting audit
trail data to the central repository, and thus believes that allowing
the NMS plan to permit such broker-dealers up to an extra year to begin
reporting data to the central repository if the plan sponsors believe
such an accommodation is reasonable, is appropriate. The Commission
believes up to an additional year could allow small broker-dealers
extra time to explore the most cost-effective and most efficient method
to comply with the Rule. The Commission acknowledges that permitting
small broker-dealers up to three years to begin reporting the required
audit trail data to the central repository will delay the ability of
regulatory authorities to obtain full information about all orders from
all participants, which in turn will result in delaying the full
regulatory benefit of the consolidated audit trail. However, the
Commission believes that such an accommodation to small broker-dealers
is reasonable, given the fact that small broker-dealers may face
greater financial constraints in complying with Rule 613 as compared to
larger broker-dealers.\285\ The Commission also notes that many small
broker-dealers are introducing broker-dealers and may be able to use
their clearing broker-dealers to report the data to the central
repository, thereby potentially reducing some of their costs.
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    \283\ See Wachtel Letter, p. 1.
    \284\ See Section III.D., infra.
    \285\ If a clearing broker-dealer receives an order from a small
broker-dealer during the period between the time the Rule is
applicable to large broker-dealers and the time the Rule is
applicable to small broker-dealers, the broker-dealer performing the
clearing function for the small introducing broker will be subject
to only the requirements of the Plan applicable directly to the
clearing broker-dealer, while the small introducing broker will not
be subject to the reporting requirements at that time.
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d. Reportable Events and Consolidated Audit Trail Data Elements
    As proposed, Rule 613 would have required SROs and their respective
members to provide certain information regarding each order and each
``reportable event'' to the central repository. A reportable event
would have been 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.
    For the reportable event of receipt and origination of an order,
proposed Rule 613(c)(7)(i) would have required the reporting of the
following data elements: (1) Information of sufficient detail to
identify the customer; (2) a unique customer identifier for each
customer; (3) customer account information; (4) a unique identifier
that would attach to an order at the time of receipt or origination by
the member; (5) a unique identifier for the broker-dealer receiving or
originating an order; (6) the unique identifier of the branch office
and registered representative receiving or originating the order; (7)
the date and time (to the millisecond) of order receipt or origination;
and (8) the material terms of the order.
    For the reportable event of routing of an order, proposed Rule
613(c)(7)(ii) would have required the reporting of the following
information by the member or SRO that is doing the routing, each time
an order is routed: (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; and (7) the material terms
of the order.
    Rule 613(c)(7)(iii), as proposed, also would have required the
collection and reporting by the SRO or member receiving a routed order
of the following information: (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.
    For the reportable events of modification or cancellation of an
order, proposed Rule 613(c)(7)(iv) would have required the following
data be collected and reported: (1) The date and time (in milliseconds)
that an order modification or cancellation was originated or received;
(2) the price and remaining size of the order, if modified; (3) the
identity of the person responsible for the modification or cancellation
instruction; and (4) other modifications to the material terms of the
order.
    For full or partial executions of an order, proposed Rule
613(c)(7)(v) would have required the following information 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; and
(8) whether the execution was reported pursuant to an effective
transaction reporting plan or pursuant to the OPRA Plan.
    The Commission received comments on the information proposed to be
recorded and reported to the central repository for each reportable
event (i.e., the consolidated audit trail data elements) but did not
receive comments on the proposed definition of reportable event in
proposed Rule 613(j)(5) (i.e., the events that trigger consolidated
audit trail reporting requirements). However, the Commission is making
clarifying changes to proposed Rule 613(j)(5) (renumbered as Rule
613(j)(9)) to define a ``reportable event'' as including the original
receipt of a customer's order by a broker-dealer; the origination of an
order by a broker-dealer (i.e., a principal order); and the receipt of
a routed order. Thus, Rule 613(j)(9), as adopted, provides that ``[t]he
term reportable event shall include, but not be limited to, the
original receipt or origination, modification, cancellation, routing,
and execution (in whole or in part) of an order, and receipt of a