* Exchanges have 270 days to submit plan for database
* Database to have trade orders, executions, cancellations
* SEC's Aguilar, Walter dissent, call rule weak
* Rule will not require real-time reporting of data
* Smaller brokers will get more time to comply
By Sarah N. Lynch
WASHINGTON, July 11 A divided Securities and
Exchange Commission on Wednesday adopted a rule designed to
bolster its surveillance of the equities markets by establishing
a central database that stores every trade order, execution and
The rule will bring the SEC one step closer to having a
consolidated audit trail to better police for market
manipulation and insider trading, though the new database will
not be operational in the near term.
The rule would give U.S. exchanges 270 days to jointly
submit a plan for establishing a consolidated audit trail. The
exchanges and the Financial Industry Regulatory Authority
(FINRA), as well as their broker members, would be required to
provide detailed information to the database.
The exchanges' plan will be subject to SEC approval. If
approved, the parties would need to start reporting data within
Though the SEC's five commissioners all supported the
concept of a consolidated audit trail, not everyone agreed on
Wednesday with how the final rule was drafted.
The rule was approved on a 3-2 vote, with Democrats Luis
Aguilar and Elisse Walter voting no amid concerns it gives
exchanges too much flexibility.
"I believe that the rule should not require that all the
SROs (self-regulatory organizations) jointly submit a single
plan. Rather, the rule should provide the commission with the
ability to consider a fulsome discussion of competing
solutions," Aguilar said.
"This assumes that all SROs will have equal weight and
negotiation power, which is just not realistic."
Walter's no vote marked a rare public disagreement with SEC
Chairman Mary Schapiro. The two are close personal friends and
previously worked together at FINRA.
"I believe that the rule before us today falls far short of
where we need to be in terms of bringing market oversight into
the 21st century," she said, calling the rule "disappointingly
She added that she hoped exchanges will go "above and
beyond" the minimum requirements of the rule, proving her
Schapiro sought to reassure both Walter and Aguilar, saying
the SEC will "push and pull" to ensure the final plan will meet
the agency's needs.
The idea of establishing a consolidated audit trail gained
momentum after the May 6, 2010, "flash crash" that temporarily
wiped out roughly $1 trillion in shareholder equity in a matter
The fragmented nature of the U.S. equities markets made it
difficult for the SEC to piece together exactly what happened,
and it took months for the SEC to gather and analyze all of the
"A consolidated audit trail will significantly increase the
ability of regulators to monitor overall market structure, so
that both the commission and the SROs can be better informed
about how our rules are affecting the markets," Schapiro said.
"Having more precise data on the trading patterns of
different types of market participants would help us better
understand the impact of high frequency trading on the quality
and fairness of our markets."
As expected, the final rule has been scaled back from the
original 2010 proposal by removing a key provision that would
have required the trade data to be submitted in real time.
Exchanges like NYSE Euronext and brokers like TD
Ameritrade had balked at that provision, saying it was
too costly to implement and would not provide much benefit.
Under the final rule, they will need to submit the data by 8
a.m. the following morning.
Gregg Berman, a senior official in the SEC's trading and
markets division, said the switch from real-time to next-day
reporting will not be a disadvantage to the SEC.
"Virtually all of the benefits of a (consolidated audit
trail) can be achieved using an 8 a.m. reporting deadline," he
The rule will also require the information to be tagged and
stored in such a way that the SEC will be able to follow an
order "through its entire life cycle."
Each broker-dealer and exchange will also be assigned a
unique identifying number.
The final rule gives more deference to exchanges than the
original proposal, allowing them to determine the specifics of
how market players report the data to the central repository.
The SEC also said it will give smaller broker-dealers up to
three years, rather than the two previously proposed, to begin
reporting the data.
Questions about the final costs of the consolidated audit
trail were still a bit unclear. Initially, the SEC estimated it
could cost $4 billion for the industry collectively to create
the database and have real-time reporting.
The SEC decided to kick a cost-benefit analysis of the final
rule down the road and wait until after the exchanges submit
their plan before proceeding with a cost study.
As part of the plan that exchanges must submit to
regulators, they will be required to describe in detail the
costs for creating, implementing and maintaining the
consolidated audit trail.