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March 1, 1998

Frustration Mounts on OATS Challenge

By Jeffrey L. Winograd

Also in this article

  • Frustration Mounts on OATS Challenge
  • Page 2

Frustration over the momentous task of implementing the National Association of Securities Dealers' Order Audit Trail System (OATS) may be unnerving both regulators and the trading community.

At press time, however, the current stumbling blocks pushing back the phase-in from August to Jan 1., 1999 under NASD prodding, and deciding the technical specifications look set to be surmounted.

"We are expecting a Securities and Exchange Commission approval [deadline] very soon," Mary Shapiro, head of NASD Regulation, told Traders Magazine in mid-February. In addition, NASD Regulation made it clear that technical specifications would be published on its OATS web page.

Bernard L. Madoff, who chairs the Securities Industry Association's OATS Ad Hoc Committee, said that SEC action by month's end was most likely imminent.

Original Deadline

Nevertheless, preparing for OATs has had industry participants hot under the collar. In particular, the original August deadline for phasing-in OATS which still officially stands, unless the SEC approves the NASD-proposed January deadline has upset many traders.

"We were hit between the eyes with deadlines for the order handling rules, and now we have OATS," said one trader, who declined to be named. "I pray that the SEC approves the new OATS timetable."

Meanwhile, a frustrated Stuart Kaswell, general counsel of the SIA, complained at a press briefing that "you cannot spec out a system without specs."

OATS is envisioned as a real-time electronic system designed to gather and report some 25 Nasdaq trade details. At the moment, Nasdaq desks electronically report certain trade information to the NASD within 90 seconds of execution.


While OATS technical specifications are pending, NASD Regulation has not been slow, however, making information available on the regulatory side. According to material published by NASD Regulation, if a firm is acting strictly in the capacity of an investment adviser and not acting as a broker dealer when recovering or handling orders, there is no reporting responsibility. On the other hand, if a firm receives and/or handles orders in Nasdaq securities, it has OATS reporting responsibilities.

Moreover, if a firm has a reporting responsibility, and it has an arrangement with a clearing firm, it is possible that the clearing firm will report order information on its behalf.

However, the agreement to use another firm must be arranged by the firm with reporting responsibility and supported in written form. The firm must also provide its clearing firm with the information required to be reported.

If a firm has a reporting responsibility, the burden is on both the firm and the submitting firm to ensure that timely, accurate and complete order information is reported. It is a shared responsibility. Member firms using non-member entities are responsible for submissions made by the non-member entities. Some member firms will be required to develop a means for electronically capturing and reporting data on specific events in the life cycle of each order.

Member firms must report oral, written or electronic instructions to initiate a transaction in a Nasdaq security, including orders received from another member firm and orders received from another department within the same firm.