Two roads are soon to converge in the sometimes-murky woods known as the U.S. stock market.
The Financial Industry Regulatory Authority, or Finra, in July will take over responsibility for tracking trades in all listed U.S. stocks, vastly expanding its audit capabilities and providing a possible route for regulators in Washington, D.C., seeking a better view into market moves.
The move announced this month will see Finra, an industry-funded self-regulatory body, track stock trading on the U.S. arms of NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ), as well as securities traded off-exchange.
The enlarged system may also provide a foundation for what is known as the consolidated audit trail sought by the Securities and Exchange Commission as it revamps oversight in the wake of the May 6 flash crash, which rattled investors' confidence in the existing regime.
The months taken to sift data and interview traders after the flash crash highlighted the SEC's need for a more complete view of domestic stock dealing, which is scattered across dozens of exchanges and electronic platforms. A consolidated audit trail has been floated by SEC Chairman Mary Schapiro as a key means to analyze market disruptions and detect suspicious activity.
Finra last May agreed to assume surveillance of NYSE Euronext's U.S. equities and options markets, taking over from the NYSE's in-house regulatory team. Finra already oversaw trade on Nasdaq OMX and BATS Exchange. The International Securities Exchange, also monitored by Finra, oversees the two stock exchanges run by Direct Edge.
The agreement with NYSE Euronext will see Finra in July begin to expand its Order Audit Trail System, or OATS, to cover shares monitored by NYSE Regulation's Order Tracking System, or OTS. Both collect information from brokers concerning stock trades, giving regulators a look into trading times and the way electronic orders flow across various exchanges.
Finra officials for years have touted the idea as a more-efficient approach to supervising securities dealing, and now are seeking for the combined system to underlie the SEC's consolidated audit-trail project.
"There has been a lot of work done by firms to make their systems OATS-compliant," said Stephanie Dumont, regulatory counsel for Finra, in an interview. "One of our suggestions is that they use our OATS as a foundation."
A spokesman for the SEC had no immediate comment.
The initial cost of the SEC's audit-trail venture was originally pegged at $4 billion, with $2.1 billion in annual maintenance costs, drawing protests from the trading community that would bear the expense. But SEC Chairman Schapiro in a speech last month said the figure could be substantially lower, and implementation faster, if the agency can take advantage of existing technology.
"OATS is a pre-existing system that broker-dealers are already set up for," said Laura Pruitt, a partner at law firm Schiff Hardin LLP and former senior counsel at the SEC.
One possible knock against the existing OATS system: It may not provide the real-time information the SEC has said it would like to see in a consolidated audit trail. Regulators may have to settle for end-of-day or next-day information, or else develop new functionalities to give any consolidated audit trail a second-by-second view of trading.
Finra aims to begin a three-part expansion of its OATS system to NYSE-listed stocks, as well as equity securities traded off-exchange, on July 11, according to a notice issued earlier this month.
"We'd hope that the SEC intends to leverage the expanded OATS system for the consolidated audit-trail proposal," said James McHale, associate general counsel for the Securities Industry and Financial Markets Association.
"The number-one advantage is that it could be done much more quickly," rather than building a brand-new system from the ground up, he said.
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