Order Audit Trail System (OATS) requirements require firms to report information related to handling and execution of customer orders as well as certain proprietary orders for NASDAQ and OTC (Over-The-Counter) equity securities. This information allows FINRA to recreate the life cycle of the order that is critical for effective regulation.

We take a look at OATS reporting requirements, the challenges financial firms face to comply with them and how they can be addressed.

What is OATS?

6793826885_d3b6befb99_zFINRA established Order Audit Trail System (OATS), an integrated audit trail of order, quote and trade information for all NMS (National Market System) stocks and OTC equity securities. OATS requires electronic auditing and reporting capabilities on all stock and equity orders, quotes, trades and cancellations. The rules for OATS were approved by the SEC on March 6, 1998. FINRA uses this audit trail system to recreate events in the life cycle of orders and more efficiently monitor trading practices of member firms.[1]

OATS requires time sensitive information related to events throughout the order execution process to be recorded accurately. According to Rule 7430 (updated from NASD Rule 6953), all computer clocks and timestamping devices must be synchronized to be with reference to a time source as designated by FINRA. This data can be collected during the day and transmitted to OATS in one or more files at a convenient time; however, reports for events that occur during particular OATS Business Days must be reported by 5am EST the following calendar day.[2]

Why is it challenging for banks?

FINRA fined Goldman Sachs Execution & Clearing $1.8 million on July 27, 2015 for systemic OATS reporting violations spanning a period of 8 years, including failure to accurately submit trade reports to FINRA Trade Reporting Facility. FINRA rules mandate firms to transmit applicable data for OATS in a complete and accurate manner.[3] Similar fines were previously levied in 2008 to three firms for not having adequate systems of supervision in place to monitor OATS reporting compliance. The total fines for these firms came to about $1.6 million.[4]

Similarly, financial firms that are under the purview of FINRA with OATS applicable compliance requirements face issues due to various technology and regulatory complexities. Some of these challenges are as follows:

1. Data inaccuracy and reporting complexities

On February 27, 2014, SEC approved FINRA’s proposed rule requiring firms to express time in milliseconds when reporting order information for OATS if firm’s system are capable of capturing time in milliseconds. This amendment came into effective from April 7, 2014.[5]

This create large complexities as firms are required to record order event times in hours, minutes, seconds and milliseconds (HH:MM:SS:mmm). This requirement means firms now have to record and store data for every order with more values and report it within the stipulated timeframe. The Head of Enterprise Architecture at NYSE described the problem as such:

“When you’re talking about billions of transactions per day, building systems that can take unfriendly data and turn it into regulation-friendly, analysis-ready information is a key, ongoing struggle… We are obligated to maintain data [for seven years]. There [was] not one system out there that could actually store that data and have it online.”[6]

Thus, OATS is complex and costly because it requires data to be found, collected, transformed, stored and reported on-demand from a variety of sources and data formats with relatively short timelines, eventually leading to issues like data inaccuracies.

2. Data storage and Real-time Monitoring

OATS requires various data elements such as: account type code, limit order display indicator, limit price, routing firm MP ID, routed order ID, etc. to be reported in a timely manner comprising of complete and accurate information. [7] To ensure this information is proper, firms need to match and compare Order/Trade Rates, crosscheck the reported Routed Order ID is correct with accurate Electronic Synchronized Timestamps, and other analytical operations.

This requires all transactional and financial documentation to be stored and maintained for at least three years, many a times requiring a longer shelf life. Records must be readily searchable and retrievable to ensure smooth and timely functioning of the analytical operations.[8]

Other than having capable systems that can efficiently store large amounts of data, FINRA also requires for proper supervision of records to ensure there are no lapses.

3. Diverse Markets and Trading Systems

Complications arise when firms look to diversify their business model to take advantage of various trading systems and execution venues. No trading systems or markets are alike, each having their own strengths and weaknesses.

FINRA requires a single record for each order; from when order was received, where it was routed, when it was routed to liquidity destination, when execution came back and whether there was a cancellation/replacement.   When each system is left to report OATS individually, the consolidated OATS records and the mix-and-match approach leads to several issues.

4. Changing requirements and high costs

As FINRA keeps issuing various updates to streamline the existing process of OATS reporting to be more precise, firms faced with complex and frequently changing reporting environment prefer to go with a single system approach. Although it eliminates the issues that crop up due to diversification, the approach is expensive and challenging for existing business models that are in place. [9]

How does Hexanika help?

Hexanika is a FinTech Big Data software company, which has developed an end to end solution for financial institutions to address data sourcing and reporting challenges for regulatory compliance.

Our software platform streamlines the process of data integration, analytics and reporting by cleaning and joining the sourced data through semantics and machine learning algorithms. This ensures OATS applicable data is securely stored in the cloud and is easily retrievable using Hadoop architecture.

Our solution also simplifies data governance process and generates timely and accurate reports to be submitted to regulators in the correct formats. Our solutions also significantly reduce the time and resources required for everyday-regulatory processes, and are robust enough to be implemented on existing systems without requiring any specific architectural changes.

This provides an accurate OATS report with the option to analyze the data in using business Intelligence for analytics and tracking record changes.

 

Contributor: Vedvrat Shikarpur

Image Credits:  401(K) 2012 via Creative Commons (Website: http://401kcalculator.org)

 

[1] FINRA OATS page

[2] FINRA OATS Technical FAQs: Q T10

[3] Valuewalk: FINRA Fines Goldman Sachs $1.8 Million For OATS Reporting Violations

[4] FINRA: FINRA Fines Three Firms a Total of $1.6 Million for OATS Reporting and Supervision Violations

[5] FINRA: Firms Capturing Time in Milliseconds Required to Report to OATS in Milliseconds Beginning April 7, 2014

[6] Cloudera: Full-Fidelity Analytics and Regulatory Compliance in Financial Services

[7] FINRA: OATS Report – November 2, 1999

[8] FINRA OATS FAQs: Q C8

[9] SS&C: Can you meet your OATS Reporting Requirements?

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