Bloomberg News

SEC Likely to Adopt Audit Trail Rule This Year, Ex-Official Says

October 14, 2011

Oct. 14 (Bloomberg) -- The Securities and Exchange Commission will probably adopt its plan to collect and store data on U.S. equity orders and trades later this year, according to a former official.

“I think it will happen before year-end,” James Brigagliano, former deputy director of the SEC’s division of trading and markets, said at a Security Traders Association conference today in West Palm Beach, Florida. He left the agency last month. Brigagliano said he expects the SEC to “look hard at the cost-benefit in terms of what information should be required to be real-time versus available on a delayed basis.”

The SEC proposed requiring exchanges and the Financial Industry regulatory Authority to develop a so-called consolidated audit trail after the crash on May 6, 2010. It said the system would help it analyze and explain the cause of events such as the rout 17 months ago that erased $862 billion in 20 minutes. The SEC took three months to gather data on stock trading after the plunge since information didn’t exist in a uniform or accessible format from exchanges and brokers.

John Nester, an SEC spokesman, declined to comment on the timing of the consolidated audit trail.

Regulators want real-time data to help pursue enforcement actions and improve surveillance of a market in which transactions occur on more than 50 platforms, the SEC said.

Euronext, Scottrade

Finra and firms such as NYSE Euronext, Scottrade Inc., Wells Fargo & Co. and the Securities Industry and Financial Markets Association have told the SEC that collecting real-time information will be too costly and that data available at the end of the day or the next should be sufficient. Martin Manion, chief operating officer at Citadel Execution Services, a unit of Chicago-based Citadel LLC, said yesterday at the conference that end-of-day data should be “fine.”

The SEC estimated in its proposal that an audit trail project would cost exchanges and brokers $4 billion to establish and $2.1 billion a year to maintain. SEC Chairman Mary Schapiro later said that the $4 billion estimate was too high. The system would initially include equities trading data and later options, according to SEC officials.

Regulators should proceed with plans to collect and store data on all U.S. securities trading, an initiative that is “absolutely critical” to ensuring that markets are fair, NYSE Euronext Chief Operating Officer Larry Leibowitz said at a conference in New York today.

“The SEC proposal to create a centralized audit trail is absolutely critical so we can say someone is surveilling across all markets,” Leibowitz said. “It’s our job as an industry and the exchanges in particular to stand up for transparency and integrity.”

Plan of Action

In adopting a consolidated audit trail, the SEC would tell exchanges and Finra what the system must include, according to Brigagliano, who left the agency last month after 25 years for a job as partner at Sidley Austin LLP. The companies and Finra, which oversees almost 4,500 brokers, would then develop a plan to build the system.

While exchanges and larger brokers agree that regulators need an audit trail to monitor equities trading across different venues, the “big pushback” is about whether the SEC should require real-time data or not, David Shillman, an associate director in the SEC’s division of trading and markets, said at a Sifma conference on Sept. 21 in New York.

Easier Than Thought

Technology may have advanced enough in recent years that gathering real-time data may not be as difficult and costly as market participants expect, Shillman said. The commission is deciding “how strict it’s going to be” about the plan that will eventually have to be submitted to the agency by the exchanges and Finra, he said.

Richard Redding, a managing director at Chicago-based CME Group Inc., said at the STA conference that he didn’t see the benefits of mandating real-time data for a consolidated audit trail in the securities industry. CME Group’s markets such as the Chicago Mercantile Exchange have access to data the next day and have compiled the data for years, he said.

“I’m not sure what you can do with it in real time,” Redding said. “I’m not sure the regulators can even process it in real time.”

The SEC adopted a rule in July related to the audit trail requiring large traders to use an identification code for their buying and selling. Employing a uniform code for transactions handled through brokers will enable the SEC to produce a complete picture of their activity.

Blue Sheets

The project expands the data available to the SEC through the so-called Electronic Blue Sheets, a system regulators use to make and receive requests for data as part of investigations or other actions. In contrast the audit trail would gather all order and trade information for all activity in the market.

Large traders must register with the SEC by December, while brokers have until April to comply with the rule requiring them to provide requested data the day after it’s asked for, Brigagliano said.

“Both of these initiatives are intended not only to augment the ability of regulators to better oversee the markets, but also to provide a wealth of continuous data that can inform broader discussions about market structure, including the role and impact of high-frequency trading,” Gregg Berman, adviser to the SEC’s director of trading and markets, said at the Sifma conference in September.

--With assistance from Joanna Ossinger and Whitney Kisling in New York. Editor: Nick Baker

To contact the reporter on this story: Nina Mehta in New York at

To contact the editor responsible for this story: Nick Baker at

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