Good Morning. This is an open meeting of the U.S. Securities and Exchange Commission on
May 26, 2010.
First on our agenda today, the Commission will consider whether to propose a rule that
would result in a single consolidated audit trail for orders and securities transactions
throughout the U.S. equity markets.
Second, we will consider adopting amendments to an existing rule that would enhance the
quality and timeliness of information available to investors of municipal securities.
* * *
We will begin with the staff's recommendation for a consolidated audit trail.
On May 6, the Dow Jones Industrial Average dropped more than 573 points in just five
minutes of trading. And then, suddenly reversed, recovering 543 points in approximately 90
seconds.
In the ensuing weeks, the SEC and the Commodity Futures Trading Commission (CFTC) have worked
to determine both the cause of these events and factors that may have exacerbated the
volatility.
But the SEC's efforts to reconstruct the trading on that day are substantially more challenging
and time consuming than we would have liked because no standardized, automated system
exists to collect data across the various trading venues, products and market participants.
On May 6, more than 19 billion shares of stock were traded across multiple markets — each
with its own individual, and in some cases incomplete, data collection approach.
Today, stock market regulators tracking suspicious activity or reconstructing an unusual event
must obtain and merge an immense volume of disparate data from a number of different
markets and market participants. The technology for collecting data and surveilling our markets
is often as much as two decades behind the technology currently used by those we regulate.
As a result, there is an intense need for regulators to have efficient access to a far
more robust and effective cross-market order and execution tracking system
That is why, last summer, we convened an agency wide task force to develop a proposal for
a consolidated audit trail — a system that would help regulators keep pace with the new
technology and trading patterns in the markets. If adopted and implemented, this consolidated
audit trail would, for the first time ever, allow the SEC and self regulatory organizations
to track trade data across multiple markets, products and participants simultaneously,
in real time. It would allow us to rapidly reconstruct trading activity and to quickly
analyze both suspicious trading behavior and unusual market events.
Today's proposed rule would require the SROs to jointly develop a national market system
(NMS) plan to create, implement, and maintain a consolidated audit trail. Under the rule,
the SROs, and their members would be required to collect and provide significant detailed
information regarding each quote and order in an NMS security to a newly created central
repository.
The information would capture each step in the life of the order, from receipt or origination,
through the modification, cancellation, routing and execution of an order. Most of the information
would be required to be reported in real time, as the event — including, receipt, routing
and execution — is occurring.
Notably, the proposed rule would require members to provide to the central repository information
identifying the "ultimate customer" who generated the order. And, it would require members to
"tag" each order with a unique order identifier that would stay with that order throughout
its life.
This information is designed to allow regulators to more easily and quickly identify potentially
manipulative activity occurring across markets and through multiple accounts at multiple
broker-dealers.
Initially, the proposed rule would apply only to NMS securities — and listed options.
This is a significant and necessary first step. However, I believe that it is important
for the Commission to consider expanding the scope of the consolidated audit trail as soon
as practicable to include additional products, giving SROs and the Commission access to a
truly comprehensive consolidated audit trail for all securities traded in the U.S. markets.
Today's actions are part of an ambitious effort by the Commission to strengthen markets and
better protect investors' interests. That effort includes potentially restricting the
use of flash orders, increasing the transparency of "dark" pools of liquidity, prohibiting
broker-dealers from providing unfiltered access to exchanges, and creating a large trader
reporting system.
Earlier this year, the SEC issued a concept release on market structure that solicited
public comments on steps to minimize short-term volatility and systemic risk. A uniform, consolidated
audit trail would be an important next step in our efforts to maintain fair, orderly and
efficient markets.
One of the things about today's proposal about which I am most pleased is the hard work of
the task force that developed this proposal — a task force drawn from across the agency.
Staff from the Divisions of Trading and Markets, Enforcement, the Office of Compliance Inspections
and Examinations, the Division of Risk, Strategy, and Financial Innovation, and the Office of
the General Counsel all worked together from conception of this idea to its proposal in
the type of coordinated fashion that exemplifies the best traditions of this agency.
I thank all of them for their hard work. I would also like to thank the other Commissioners
and their counsel for their work and comments on the proposed rule. Thank you all.
Now I'll turn the meeting over to Robert Cook, Director of the Division of Trading and Markets,
to hear more about the proposal.