Overview
Today, the Securities and Exchange Commission (SEC) unanimously voted in favor of publishing a proposed national market system (NMS) plan to create, implement, and maintain a consolidated audit trail (CAT), submitted jointly by self-regulatory organizations (SROs) pursuant to Rule 613 of Regulation NMS (the “Plan”).
The public comment period will close 60 days following publication in the Federal Register.
Market participants, including national securities exchanges, broker-dealers, alternative trading systems, buy-side firms, and information service providers, among others, have an opportunity to share their views directly with the SEC.
Referring to the implementation of CAT as one of the Commission’s “top priorities,” Chair Mary Jo White broadly discussed the Commission’s efforts related to equity market structure and remarked that the effectiveness of its various initiatives depends on the SEC’s access to appropriate tools and resources to regulate and oversee these markets, including the CAT. Chair White observed that, while FINRA and the exchanges currently maintain separate audit trail systems, these systems do not provide ready access to all of the data necessary for effective oversight and further do not provide a mechanism to easily track activity across multiple equities and options markets. In addition, Commissioner Kara Stein recalled the events surrounding the May 6, 2010 “flash crash” and August 24, 2015 stock market plunge and remarked that the “true value” of CAT lies in the ability to track market orders “from start to finish.” Commissioner Michael Piwowar was broadly supportive of the publication of the Plan and encouraged the market participants to be “catalysts for robust data-driven economic analysis” of the Plan.
Pursuant to Rule 613, the proposed NMS Plan would provide for a plan processor (“Processor”) to build a central repository to receive and maintain reported data related to NMS securities and over-the-counter equity securities. The Plan discusses the operation of the CAT, including the governance structure, how exchanges and broker-dealers would report data, and how regulators would access such data. The plan also describes a variety of procedures to assure the timeliness, accuracy, and security of the data. In addition, the Plan includes an economic analysis and discussion of alternatives, as well as provisions related to governance of the Plan, the selection of a Processor, and books and records and financial matters.
In particular, the SROs would conduct activities of the CAT through a jointly owned Delaware limited liability company, which would be managed by an operating committee comprised of all SROs. An advisory committee would advise the operating committee on the implementation, operation, and administration of the central repository. The Plan would require SROs and broker-dealers to report to a central repository certain information about orders, quotes, origination, routing, modification, cancellation, and execution. Data would need to be timestamped contemporaneously with the order event and reported to the central repository by 8 a.m. the following day. Further, data would need to be time-stamped with a minimum granularity of one millisecond for all orders, except for manual order events which would be subject to a minimum of one second. The Commission and the SROs would have direct access to the data for regulatory and oversight purposes, and regulators would have the ability to perform complex queries.
In addition, the publication seeks public comment on a variety of topics, including the proposed maximum initial error rate of five percent for reported data, the proposed initial clock synchronization standard of within 50 milliseconds of the time maintained by the National Institute of Standards and Technology, and information security processes and controls.
In terms of the timeframe for implementation, Chair White stated that staff will prepare a recommendation for Commission action later this year. Specifically, if the Commission makes the necessary findings, it must approve the Plan within 180 days of publication. According to Rule 613, within two months of Commission approval of the Plan, the exchanges and FINRA would be required to choose the Processor. Implementation would be phased in according to entity. Exchanges and FINRA would begin to report data to the central repository within one year of Commission approval; large broker-dealers would report within two years; and small broker-dealers would report within three years.
The SEC has made available a fact sheet on the Plan, and the request for public comment on the Plan will subsequently be posted on the SEC website and published in the Federal Register.