Order Audit Trail (OATS)

Member firms execute orders for their customers and for their own accounts. Information on these orders is essential to regulatory efforts, which is why FINRA operates a system to capture basic order information from member firms. FINRAs Order Audit Trail System (OATS) captures order information reported by member firms and then integrates that order information with trade and quotation information from other systems that we just looked at.

This provides FINRA an accurate time sequenced record of orders and transactions for purposes of compliance. As they explain on their website, "FINRA uses this audit trail system to recreate events in the life cycle of orders and more completely monitor the trading practices of member firms." All FINRA member firms are required to report order information through this system in both NASDAQ and non-NASDAQ OTC equity securities. So, if it is a NASDAQ stock or a stock trading on the OTC Bulletin Board or the Pink Quote, the orders are reported to the system.

OATS combines the order information that firms report with transaction data reported through the ACT system and with quotation information entered through NASDAQ trading systems. This way, if FINRA needs to roll back the clock to see if a market maker failed to honor a published bid at 17 seconds past 10:33 yesterday morning, the OATS system makes that possible. Member firms must record each order down to the hour/minute/second, like this: 13:21:59 (order executed at 59 sec¬onds after 1:21 PM Eastern).

 

These time stamps are so important that firms must synchronize their business clocks according to FINRA guidelines so that regulators can go back to a single point of reference when sorting out what happened to determine who if anyone violated the rules. In other words, if Morgan Stanley's clock were a few seconds off from Merrill Lynch's clock ... times several thousand firms ... chaos. Some firms now have systems capable of recording transactions down to the millisecond. Such firms must add that extra decimal place in their reports through the trading facilities and to the OATS system.

But, while the clocks must be synchronized each day before the markets open, the order information reported to OATS is not done in real-time or even within 30 seconds. In fact, the order information simply must be provided by the next calendar day at 8 AM eastern. Remember it's an "audit trail" system, meaning the regulators want to see what happened yesterday down to the hour/minute/second as opposed to the quotes that are displayed in real-time through NASDAQ trading systems or the last-sale reports that are submitted to the market through the ACT platform within 30 seconds. Do all firms have to bear the burden/expense of synchronizing their clocks each day and throughout the day? No. If the firm only sells mutual funds and has no requirement to record market events, they do not have to synchronize their clock.

Whether the order is placed for a customer or the firm's proprietary trading account, the order information must be reported to the OATS system. Order information must be reported on the same day the order was executed or modified, cancelled, received, or transmitted to another department within the firm. As with the ACT system, firms can sign an agreement with a third party to transmit order information on their behalf. In this case one Reporting Member agrees to fulfill the obligations of another, acting as a Reporting Agent to report information on the other firm's behalf. However, the firm that receives or originates the order remains ultimately responsible for making sure the order information is reported.

Orders that are partially executed are also reported. In that case the number of shares executed and the number of executed shares remaining would be reported to the system.

A brokerage firm is a busy place to work. With registered representatives taking customer orders by telephone and/or reviewing the orders placed online, what are the odds that some of these transactions will end up going wrong? Pretty high. That's why every trade must be confirmed with the customer.