On July 11, 2012, the Securities and Exchange Commission (SEC) approved a new rule, which will require the national securities exchanges and self-regulatory organizations like the Financial Industry Regulatory Authority (FINRA) to establish a market-wide consolidated audit trail. The new consolidated audit trail will improve regulators’ ability to monitor and analyze trading activity. With the approval of Rule 613, the exchanges and FINRA must jointly submit to the SEC a comprehensive plan of how they plan to develop, implement, and maintain the consolidated audit trail. Rule 613 also requires that the consolidated audit trail collect and identify every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options in all U.S. markets.
Currently, each self regulatory organization utilizes its own separate audit trail system, each with its own set of data collection requirements. Before Rule 613, regulators had to collect and merge large volumes of data from several entities in order to analyze market activity, thus making it difficult for the SEC to analyze data quickly and accurately. The burdensome nature of the separate audit trail systems became especially apparent during the SEC’s analysis of the “Flash Crash” on May 6, 2010, when the Dow Jones average dropped 1,000 points and then recovered within three minutes. The SEC said it took “dozens” of analysts, economists, and data technologists four months to analyze the trading activity data and identify the causes of the crash.
With the consolidated audit trail, the SEC believes it will increase its ability to (1) investigate illegal activity such as insider trading; (2) quickly reconstruct market events to arrive at a proper course of action sooner; and (3) monitor the effect of the SEC’s regulations on the market.
SEC Chairman Mary Schapiro applauded the passing of the Rule, stating, “Today’s rule ultimately will lead to better protections for investors, and fairer, more orderly, and more efficient markets.”