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March 1, 2011

NYSE's Order Trail System Is Passing Into History

By Peter Chapman

NYSE Euronext's Order Tracking System is fading away. In July, when the Financial Industry Regulatory Authority migrates broker reporting of NYSE-listed trades to its Order Audit Trail System, the NYSE will decommission OTS.

The OTS and other surveillance procedures were mandated by the Securities and Exchange Commission in 1999 in the wake of a floor trading scandal. The SEC decided NYSE's surveillance of its floor brokers wasn't up to snuff and directed the exchange to establish an electronic order and trade reporting system.

OTS went live in 2003. Its rules require traders to keep records of orders in electronic format and submit them via OTS when asked. The rules apply to trades in securities listed on NYSE, NYSE Amex and NYSE Arca. With the takeover by FINRA of NYSE Regulation's surveillance duties last year, FINRA's plan has been to consolidate all reporting onto OATS.

That process begins on July 11, continues on July 18 and ends on July 25. Once the phase-in is complete, broker-dealers will be reporting all trades in National Market System securities as well as over-the-counter names to OATS.

OATS plays a similar role as OTS. Like OTS, OATS was born of a trading scandal on the Nasdaq side of the market in the mid-1990s. The rules surrounding OATS are significantly more onerous, however, and failures to comply have resulted in a steady stream of fines accruing to FINRA.

OATS rules require traders to update daily, while the NYSE only requires traders to send information to OTS when asked. Even then, traders have 10 days to comply. The data requested by both systems is largely the same.

The changeover is likely to have the biggest impact only on those NYSE floor brokers that don't trade Nasdaq or OTC securities. They've only had to deal with OTS, a system they claim is more "intuitive," according to sources. An NYSE spokesperson said the exchange is retrofitting its in-house order management systems to accommodate OATS reporting.

For all others, the switch is likely to be a non-event. "Right now on our internal OATS program, we just exclude listed trades," said Dave Sobel, EVP for compliance and in-house counsel at Abel/Noser. "So, we'll just take away the exclusion. It'll start reporting everything. For us it saves an extra step."


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