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84-55 Implementation of NASDAQ Equity Audit Trail

I M P O R T A N T

Officers * Partners * Proprietors

TO: All NASD Members

The NASDAQ market has over the past several years experienced a sustained period of growth which in many ways is attributable to the use of technologically advanced facilities and systems that have served to enhance the quality of this marketplace. The significant growth and visibility of the NASDAQ market, along with the anticipated addition of NASDAQ options, has underscored the need for increased use of state-of-the-art automation and technology to facilitate continued improvements in the regulatory programs affecting NASDAQ securities. In recognizing this need and as a result of the SEC's emphasis on improved automated surveillance capabilities on NASDAQ and the exchange markets, the NASD Board of Governors, on July 13, 1984, approved an Association plan for the development of a NASDAQ Equity Audit Trail.

The NASDAQ Equity Audit Trail will embody trade-for-trade detail in NASDAQ securities and listed securities traded off-board by all participants, which will include:

  • security identifier
  • price of the trade
  • size of the trade
  • time of trade
  • clearing firm - buy side
  • clearing firm - sell side
  • executing firm - buy side and capacity (principal or agent)
  • executing firm - sell side and capacity (principal or agent)
  • trade reference number of automated executions (i.e., SOES, CAE)

Although several of the above-listed items are already available through NASDAQ and/or clearing corporation systems, the collection and processing of those key elements which are not presently available will require additional information from members. Most significant among these are:

  • An expanded level of transaction information to be provided by members to the clearing corporations to include "time of trade" and a capacity indicator (principal/agency) for each transaction in a NASDAQ security.
  • Additional information to be included by members in real time trade reportable securities to include a "buy/sell" indicator (NASDAQ/NMS and off-board trades).
  • Audit trail information to be provided by members to the clearing corporations for internalized trades in non-trade reported NASDAQ securities.
  • The submission of trades in NASDAQ securities between members now done ex-clearing to a clearing facility.

The NASDAQ Equity Audit Trail will be implemented in seven phases, with each phase containing steps designed to assure that all aspects of the audit trail will be accomplished in a way which maintains the accuracy and completeness of the information collected. Priorities associated with the development of the NASDAQ Options Program have been taken into account in the sequencing of these phases so that the NASDAQ Equity Audit Trail for trade reportable securities will be available at the earliest stage possible. The seven phases of the Audit Trail Plan are as follows:

Phase

I

Capturing time of trade and a capacity (principal/agency) indicator by clearing corporations.

Phase

II

Trade reporting changes for inclusion of a buy or sell indicator for reporting firms.

Phase

III

On-line audit trail retrieval capabilities in the form of an integrated journal.

Phase

IV

TARS Phase II - including mandatory submission of trades between NASD members to a clearing corporation.

Phase

V

Mandatory submission of internalized trades in non-trade reported NASDAQ securities to a clearing corporation.

Phase

VI

Inclusion of Form T information with the audit trail.

Phase

VII

Inclusion of news headlines as part of the audit trail data.

Phases I and II are tentatively scheduled for implementation beginning during the second quarter of 1985. This projection is, of course, dependent on timetables established by the clearing corporations, with whom the Association is closely coordinating, and the ability of members to adapt to new clearing input formats. In this regard, every effort will be made by the Association to assure that members are given adequate assistance and time to make necessary internal system or procedural changes to accommodate the data collection processes.

Trade reporting rule changes will be made under Schedule D and G of the Association's By-Laws to reflect the additional requirement to report a buy or sell indicator for each trade report.

Members will be kept apprised of developments regarding the NASDAQ Equity Audit Trail well in advance of scheduled implementation dates for the various phases. In this connection, the clearing corporations will be providing guidance on changes effecting member clearing input within the next several weeks.

Should you have specific questions or wish to discuss any aspects of NASDAQ Equity Audit Trail requirements as they relate to your firm, please contact Christopher Franke, Director, Market Surveillance, at (202) 728-8186 for changes in trade reporting rules or Robert Primmer, Assistant Director, Systems Development, at (212) 839-6223 for matters affecting changes to clearance procedures.

Sincerely,

Frank J. Wilson
Executive Vice President and General Counsel


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