WASHINGTON — U.S. stock exchanges and markets must establish a uniform system for tracking all orders and trades under a rule approved Wednesday by the Securities and Exchange Commission.
The commission said the requirement is intended to make it easier for the government to investigate market disruptions, such as the “flash crash” two years ago that sent the Dow Jones industrial average plummeting nearly 600 points in five minutes.
The commission voted 3-2 to require all U.S. exchanges and electronic-trading platforms to keep the same formof audit trails covering orders from start to finish. Currently, audit trails vary among exchanges. Regulators say that has made it more difficult to get their hands on current order data.
Regulators say the change will make it easier to pinpoint the causes of disruptions.
“A consolidated audit trail that accurately tracks orders throughout their life cycle and identifies the broker dealers handling them will provide us with an unprecedented ability to effectively oversee the markets we regulate,” Securities and Exchange Commission Chairman Mary Schapiro said.
Under the rule, the U.S. exchanges will have to jointly submit a plan for creating an overall system to collect and identify every trading order from start to execution. The plan must be submitted to the commission by April. If it is approved by the agency, the exchanges would have to start reporting information within a year.
The commission was criticized after the May 6, 2010, flash crash, which hurt investor confidence and highlighted the agency’s inability to keep pace with technological changes.
Traditional exchanges are now competing with electronic-trading platforms. And high-frequency traders have computers that can place stock trades in fractions of a second, giving them an edge when buying or selling.
The speed also can disrupt the system when there are errors. That’s what happened during the flash crash.
Schapiro said the new system would give regulators quick access to most of the data and help them reconstruct what disrupted trading in days, rather than weeks.
It will also make markets fairer and more efficient, she said.
Schapiro, a political independent, was joined by Republicans Troy Paredes and Daniel Gallagher in supporting the rule.
Democrats Elisse Walter and Luis Aguilar voted against it. They said the requirements for a new tracking system had been weakened from the commission’s original proposal made in late May 2010.
“Not striving” for a realtime reporting regime “seems to ensure that the industry remains one step or one day ahead of the regulators,” Walter said.
The proposed rule called for securities markets to report trading information to the central database in real time. In the final rule, they must submit the data by 8 a.m. Eastern the next trading day.
Wall Street’s biggest lobbying group, the Securities Industry and Financial Markets Association, opposed real-time monitoring. The nextday standard adopted by the SEC “is a more manageable and cost-effective approach to this kind of system,” Randy Snook, the association’s executive vice president, said in a statement after the vote.
Gregg Berman, a senior adviser to the director of the SEC’s trading and markets division, told commissioners at the end of their meeting that real-time reporting doesn’t provide better information than the next-day standard.
“The only advantage of real-time data is that an analysis might start sooner but not that it will be better,” Berman said.
Regulators eventually determined that the flash crash occurred when an investment and trading firm executed a computerized selling program in an already-stressed market.
The firm’s trade, worth $4.1 billion, touched off a chain of events that ended with investors swiftly pulling their money from the stock market.
Commission officials said the new system also would help track insider trading.
Regulators currently keep tabs on the markets and monitor trading using data stored in different formats. The consolidated audit trail would be a centralized data hub.
The approval of the rule leaves it to self-regulatory organizations - including the Financial Industry Regulatory Authority - to develop the specifics of how the consolidated audit trail will work.
The Financial Industry Regulatory Authority oversees 4,400 brokers.
“We are not going to throw this rule over the transom and say to the [stock exchanges] come back to us with whatever you think works here,” Schapiro said at the closing of Wednesday’s meeting. “We’re going to stay intimately involved. We’re going to have to push and pull and make sure that the plan meets our standards.” Information for this article was contributed by Marcy Gordon of The Associated Press and by Steven Sloan, Nina Mehta and Gregory Mott of Bloomberg News.
Front Section, Pages 1 on 07/12/2012