Recently, a glitch in a trading algorithm used by Knight Capital Group nearly caused the firm to collapse from its trading losses. The Securities and Exchange Commission (the "SEC") has been looking at the impact trading algorithms are having on the markets, generally, for a number of years, and intensely after the "flash crash" in May 2010. With the vitality of our national markets in mind, we thought we would highlight the SEC's recent rulemaking effort in this area, which is intended to provide the SEC with a tool to access cross-market order and trading information in a timely and accurate manner.
On July 11, 2012, the SEC adopted Rule 613, a rule originally proposed in 2010, which requires national securities exchanges and self-regulatory organizations ("SROs") to submit a national market system ("NMS") plan to create, implement, and maintain a consolidated audit trail with respect to NMS securities. The SEC believes such a plan is necessary because the current data infrastructure relied on to provide customer and order event information is outdated and inefficient. The SEC and SROs currently use a variety of sources to obtain information necessary for their regulatory obligations, including the EBS system, equity cleared reports, and SRO audit trail data. As the adopting release notes, under the current system, regulators "must attempt to cobble together disparate data from a variety of existing information systems lacking in completeness, accuracy, accessibility, and/or timeliness—a model that neither supports the efficient aggregation of data from multiple trading venues nor yields the type of complete and accurate market activity data needed for robust market oversight." To address this problem, Rule 613 outlines a broad framework for the creation, implementation, and maintenance of a consolidated audit trail and requires SROs to submit a NMS plan created under such framework. Rule 613 sets forth certain minimum requirements that must be included in any proposed NMS plan, for example, the requirements that (i) a consolidated audit trail be collected for all NMS securities traded in secondary market transactions, (ii) information be provided in a central repository for every order, and "reportable event" relating to an order, in an NMS security originated or received by a FINRA member, (iii) each national securities exchange and its members provide information for registered or listed securities to the central repository and (iv) unique identifiers are created for broker-dealers, national securities exchanges, and customers. The SROs are also charged with creating a plan detailing how these data elements would be recorded, reported, collected, and stored. Given the steps involved in adopting a final consolidated audit trail plan, and the potential for future expansion, some believe that it could be several years before the NMS plan is fully implemented. See " Consolidated Audit Trail – Effective October 1, 2012 for additional information on Rule 613 and a link to the Release.