The Order Audit Trail System (OATS) maintains detailed records of securities transactions to facilitate tracking and review of orders, particularly in situations involving trading errors or suspected market manipulation. Member firms of FINRA are obligated to record and report orders to FINRA as part of the OATS requirements. It is the responsibility of the broker or member firm handling client orders to provide OATS data to FINRA.
Basics
The Financial Industry Regulatory Authority (FINRA) has implemented OATS, an automated computer system. OATS records essential information about orders, quotes, and related trade data for all equities traded on the National Market System (NMS), including over-the-counter (OTC) stocks. Its purpose is to streamline the tracking and auditing process of orders, from the moment they are received to their final execution or cancellation.
What Is OATS?
OATS was established by FINRA to accurately record time-sensitive information related to the order execution process. This ensures the monitoring of trading practices by member firms, who are obligated to capture and report trade data to OATS. Traders and investors are not responsible for submitting OATS data; it is the duty of the broker or member firm associated with FINRA.
To maintain accuracy, member firms must synchronize their business, computer, system, and time-stamping clocks. This prevents errors and issues arising from incorrect order timestamps. If a firm struggles to record or submit the required OATS information, they have the option to engage a third party to handle the data submission on their behalf. This arrangement allows for flexibility, as the clearing firm used by the firm may not handle OATS recording.
Reporting Systems Within OATS
Firms are required to submit daily electronic OATS reports to FINRA, either on the same day an order is received or when the information becomes available. These reports can cover single or multiple orders and include various details such as the order identifier, security being traded, market participant symbol or identifier, order terms (buy, sell, sell short, price, number of shares, account type, and order type), and the date and time the order originated.
Rule 7440 outlines a total of 21 requirements that must be recorded. To comply with regulations, OATS data must be preserved for a minimum of three years. During the first two years, the data should be readily accessible for potential reviews.
The Difference Between OATS and CAT
Under SEC Rule 613, the Consolidated Audit Trail (CAT) has become the mandated system for tracking trades comprehensively from initiation to completion. Unlike OATS, the CAT imposes more extensive obligations. Deloitte notes that the CAT goes beyond OATS, encompassing additional requirements such as options data, allocations, and customer data. As a result, firms may need to reassess their reporting architectures to accommodate these new data sets. Importantly, the CAT does not offer any exemptions to these reporting requirements.
Detecting Market Manipulation
OATS and CAT are essential tools for monitoring suspicious behavior and ensuring financial oversight. These systems record and track relevant data, making it easier to identify individuals involved in such activities.
A significant case exemplifying the importance of audit trails occurred on May 6, 2010, when a day trader manipulated the S&P 500 E-mini market through "spoofing." By utilizing an automated program, the trader initiated a series of sell orders that triggered a flash crash. This incident highlighted the need for robust audit trail systems to detect and prevent market manipulation.
In 2015, the responsible individual, a resident of London, was arrested, and in 2016, he pleaded guilty to charges of spoofing and wire fraud. The case demonstrated how order audit trails played a vital role in uncovering the trader's activities. Regulators identified that the trader repeatedly placed substantial orders with no intention of executing them, but solely to manipulate the market in his favor.
Order audit trail systems, such as OATS, CAT, and other regulatory requirements, provide regulators with crucial evidence and information in cases involving suspicious trading practices. They serve as invaluable tools for maintaining market integrity and ensuring financial transparency.
Conclusion
The Order Audit Trail System is an important tool used to track and review orders, particularly in situations involving errors or suspected market manipulation. Member firms of FINRA are obligated to record and report orders to FINRA as part of the OATS requirements. OATS and other regulatory requirements provide regulators with crucial evidence and information in cases involving suspicious trading practices. They serve as invaluable tools for maintaining market integrity and ensuring financial transparency.