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June 1, 2010

OTS-OATS Merger on Tap

By James Ramage

OATS and OTS are to become one. The absorption of most of the remnants of NYSE Regulation into the Financial Industry Regulatory Authority, announced last month, will result in a merger of the systems the two regulators use to monitor brokers' order-handling practices, said Rick Ketchum, FINRA's chairman and chief executive.

Richard Ketchum

"This will allow us to move to a single order audit trail platform," Ketchum said at SIFMA's annual seminar on compliance and legal issues. "Two duplicative reporting systems make no sense. They impose needless cost on the industry and cause both FINRA and NYSE Regulation to see only part of the story."

FINRA operates OATS, or the Order Audit Trail System. NYSE Reg operates OTS, or the Order Tracking System. Both systems require brokers to input information concerning the orders they receive from the time they receive them through to execution. The regulators use the information to assess the quality of the fills the brokers' customers receive.

For more than a year, FINRA and NYSE Reg have been trying to find a way to combine their order surveillance responsibilities into a centralized system. Combining the two systems is one part of a deal that is expected to go a long way toward more effective oversight and regulation of the country's stock markets.

Under the May 4 agreement between the two self-regulatory organizations, FINRA will take on the market surveillance and enforcement functions for NYSE Euronext's U.S. equities and options markets. These include NYSE, NYSE Arca and NYSE Amex. FINRA currently monitors Nasdaq's stock and options markets, as well as Nasdaq OMX Philadelphia, Nasdaq OMX Boston, the BATS Exchange and the International Securities Exchange.

The agreement must be cleared by the Securities and Exchange Commission. Both SROs expect it to be finalized sometime around the end of the month.

The deal occurred at a time when industry players and regulators alike are clamoring for a single regulator to oversee all market activity. As the U.S. stock market has become more fragmented, the need for a single overseer has become more acute.

"With all of the information siloed in various trading venues, there's no ability for regulators to see the whole picture," Peter Driscoll, a senior equity trader with The Northern Trust Co. and last year's Security Traders Association chairman, said at STANY's 74th annual conference at Cipriani Wall Street. STANY is the New York chapter of the STA.

The May 6 market crash--where the Dow Jones Industrial Average dropped more than 600 points in minutes--highlighted the need for a consolidated audit trail, some in the industry said. Having such a system in place would help regulators more easily and efficiently review market-wide trade data following an extraordinary trading event.

In aftermath of the recent "flash crash," NYSE Euronext chief operating officer Larry Leibowitz told the House Financial Services subcommittee on capital markets, insurance and government sponsored enterprises that several specific actions should be taken to protect the markets. He included a point about surveillance.

"Ultimately, these and other important actions may be best achieved by consolidating market surveillance in one securities self-regulator--probably FINRA," he said, "which would require an act of Congress."


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