SEC moves toward requiring uniform ‘audit trail’ to dissect securities trading, disruptions

SEC proposing uniform ‘audit trail’ for orders

WASHINGTON — Federal regulators moved Wednesday toward requiring a uniform system for tracking all securities orders on U.S. exchanges, in hopes of making it easier to investigate market disruptions like the May 6 plunge.

The Securities and Exchange Commission proposed, on a 5-0 vote, requiring exchanges to maintain an “audit trail” covering trading orders from start to routing to execution.

The regulators say that would make it easier to investigate market disruptions like that of May 6 that sent the Dow Jones industrials down nearly 1,000 points in less than 30 minutes.

The new system, however, would be phased in under the SEC proposal and wouldn’t be fully operational until about three years from now, SEC officials said at a public meeting.

The rule could be formally adopted sometime after a public comment period, possibly with changes.

More than 19 billion shares changed hands on May 6. Requirements for keeping “audit trails” vary among exchanges and markets, making it hard for regulators to get their hands on current order data.

The technology used by regulators for market oversight and surveillance hasn’t kept pace with fast-evolving and splintering markets, where sleek electronic trading platforms compete with the traditional exchanges and powerful computers give traders a split-second edge in buying or selling stocks.

A new system would allow regulators to get access in real time to most of the data needed to reconstruct the type of market disruption that occurred on May 6, with the remaining data available in days rather than weeks, SEC Chairman Mary Schapiro said before the vote.

The change “would be an important next step in our efforts to maintain fair, efficient and orderly markets,” she said.

Following the so-caled “flash crash,” the SEC and the major exchanges unveiled a plan to adopt market-wide “circuit breakers” to pause trading during periods of high volatility.

Under that plan, trading of any Standard & Poor’s 500 stock that rises or falls 10 percent or more within a five-minute period would be halted for five minutes. The rules would be applied if the price swing occurs between 9:45 a.m. and 3:35 p.m. Eastern time — nearly the entire trading day.

The break is intended to head off a chain reaction of human and computerized selling, one of several possible causes of the May 6 plunge. The drop briefly wiped out $1 trillion in market value as some stocks traded as low as a penny.