Uncovering the Order Audit Trail System (OATS)
The Order Audit Trail System (OATS) serves as an automated computer system used to record data related to orders, quotes, and other pertinent trade information for all equities traded on the National Market System (NMS), including over-the-counter (OTC) stocks. Established by the Financial Industry Regulatory Authority (FINRA), OATS enables seamless tracking and auditing of orders from their inception to execution or cancellation.
Key Insights
- The OATS maintains comprehensive records of securities transactions, serving as a pivotal regulatory mechanism.
- FINRA mandates its member firms to record and report orders automatically to the OATS.
- By leveraging OATS, orders can be effortlessly tracked and reviewed amid trading errors or potential market manipulations.
- Individual investors are exempt from the duty of submitting OATS data, which is a requirement incumbent on brokers or member firms.
The Essence of the Order Audit Trail System (OATS)
An audit trail meticulously documents each step, allowing trade details or financial data to be traced back to its origin. Utilized broadly for various transactions, including accounting and brokerage activities, audit trails offer verification and transparency.
FINRA introduced OATS to ensure that the intricate and time-sensitive data involved in the order execution process is accurately recorded. Consequently, FINRA can oversee member firms’ trading activities, which must capture and transmit trade data to OATS. Noteworthy, recording and submitting OATS data remains a responsibility of brokers and member firms, not the investors.
To facilitate accuracy, member firms are also responsible for synchronizing their clocks, encompassing business, computer, system, and time-stamping capabilities, to prevent errors related to time discrepancies. If recording or submitting required OATS data proves challenging, firms have the option to engage third-party services. Importantly, such OATS tasks are separate from those handled by clearing firms, as per the Securities and Exchange Commission (SEC) approval on March 6, 1998.
OATS Reporting Procedures
Firms are obligated to submit daily electronic OATS reports to FINRA, capturing orders on the day they are received or when the information emerges. These reports can address single or multiple orders and must encompass elements such as:
- Order identifier.
- Security identification.
- Market participant symbol/identifier.
- Order terms, including buy, sell, sell short, price, share count, account type, and order type.
- Date and time of order origination.
In total, 21 recording requirements are detailed under Rule 7440. Additionally, firms must preserve OATS data for at least three years, guaranteeing accessibility within the initial two years for potential reviews.
Contrasting CAT and OATS
The Consolidated Audit Trail (CAT) under SEC Rule 613 has emerged as the prevailing system for comprehensive trade tracking. Unlike OATS, CAT entails extended obligations like options data, allocations, and customer data, necessitating firms to adapt their reporting architectures. Significantly, there are no exemptions to CAT’s reporting mandates.
Example of an Order Audit Trail in Action
One of OATS’ critical functions is surveilling suspicious trading activities. This capability came to light on May 6, 2010, when a day trader’s spoofing actions led to a significant flash crash in the S&P 500 E-mini market. Manipulation through an automated program triggered a rapid domino effect of sell orders, leading to transient but massive disruptions.
Years of regulatory scrutiny culminated in the arrest of the responsible party, a London resident, in 2015. This case underscored the value of order audit trails, emphasizing their role in maintaining transparent and accountable financial markets. Through meticulous data scrutiny, regulators identified the trader’s manipulative intent, preventing future market distortions.
Order audit trail systems, whether OATS or the evolving CAT, possess undeniable significance in safeguarding market integrity and providing crucial evidence for regulatory reviews.
References
- Financial Industry Regulatory Authority. “Order Audit Trail System (OATS)”.
- Financial Industry Regulatory Authority. “FAQ Regarding Order Audit Trail System (OATS) Compliance”.
- Financial Industry Regulatory Authority. “7440. Recording of Order Information”.
- Financial Industry Regulatory Authority. “FAQ Regarding Order Audit Trail System (OATS) Compliance”.
- U.S. Securities and Exchange Commission. “Rule 613 (Consolidated Audit Trail)”.
- Deloitte. “Consolidated Audit Trail: The Wait is Over”.
- The United States Department of Justice. “Futures Trader Charged with Illegally Manipulating Stock Market, Contributing to the May 2010 Market ‘Flash Crash’”.
- The United States Department of Justice. “United States v. Navinder Singh Sarao”.
