OATS Report - October 5, 2000

October 5, 2000

The purpose of this article is to alert NASD members and service bureaus—the providers of the data—that it has come to the attention of the staff that some member firms are incorrectly reporting information to the NASD Order Audit Trail System.

Limit Order Display Indicator

The Limit Order Display Indicator (LODI) is to be used for limit orders and stop limit orders only, and should not be used for Market or Stop orders or on orders where Special Handling Codes clearly indicate the order is not a limit order (e.g., a PEG order).

For limit orders and stop limit orders when there is an instruction from the customer not to display the limit or stop limit order or there is an instruction from the customer to display a block sized order, LODI should be set to "Y". For limit orders or stop limit orders when no instruction has been given, LODI should be set to "N". Please refer to NASD Notice to Members 00-26 OATS Limit Order Display Indicator (May 2000) for more detailed information on this subject.

Order/Trade Matching Rates

Matching OATS Execution Reports to ACT reports is a critical function in the Order Audit Trail System. Where an exact match cannot be found on Branch/Sequence Number, Issue Symbol, MPID, and Execution Time to the second, the OATS Execution Report will be considered "Unmatched".

Firms should continue to monitor their Order/Trade Matching Statistics on the OATS Web Interface at the OATS Reporting and Feedback Web page. In addition, on that same Web Page, members can view their Unmatched Execution Reports for the 10 most current available business days. Firms are expected to adjust their systems as appropriate to properly match OATS Execution Reports to ACT Reports.

Inaccurate Reporting Of The Received Method Code

The Data Dictionary in Appendix A of the OATS Reporting Technical Specifications defines the Received Method Code as an indicator of how the order was received by a member. There are four such indicators: ("E") electronically by a non-ECN; ("N") non-electronically by a non-ECN; ("C") ECN; and ("X") Unknown. The ("X") indicator is not acceptable for wholesale orders.

An electronic order does not necessarily mean that the order was received electronically. If an order was received over the phone, by fax, or even e-mail, and then entered into an electronic order routing or execution system, the Received Method Code should be "N" indicating the order was received in a non-electronic fashion by a non-ECN.

Inaccurate Or Non-Reporting Of The Routing Firm MPID

Routing is the activity of transmitting an order between two members or between different MPIDs. Any time an order is routed between two members, the firm receiving the routed order shall record the MPID of the sending firm in the Routing Firm MPID field and mark the Account Type Code as Wholesale ("W"). It is not correct to leave the Routing Firm MPID field blank when receiving an order routed from another firm. If any NASD member firm does not have an MPID, one can be secured from Nasdaq Subscriber Services (Phone: 800-777-5606).

Failure To Report The Routed Order ID

The OATS Reporting Technical Specification defines the Routed Order ID as "…the identifier assigned to an order by the order routing firm when the order was routed. This may be the same Order ID reported to OATS when the order was received, or it may be another Order ID assigned when the order was routed. The Routed Order ID must be unique within the firm for the day it was originated."

This is a required field in the Route Report for all electronically routed orders, except orders routed to an ECN. It is also a required field for New Order Reports where the order is received electronically by a non-ECN from another OATS reporting member firm. Electronic orders between two reporting non-ECNs are linked in part by the Routed Order ID. For example, if a market maker receives an order electronically from a non-ECN, it is required to report that firm's Routed Order ID on its New Order Report. Similarly, if a non-ECN routes an order electronically to a market maker, it is required to provide its Routed Order ID on its Route Report.

Electronic Synchronized Timestamps

The NASD has noted some significant negative time differences in timestamps, in particular between the time order entry firms report their routes of orders and the time that Market Makers and ECNs report as the receipt time of those orders. For example, an order entry firm reports that it has routed an order at 10:30:02 to Market Maker A. Market Maker A records the receipt of the order at 10:29:32 (i.e., a full 30 seconds earlier). This calls into question whether one or both firms may not be synchronizing their business clocks.

The NASD has also noted some instances of this occurring within the same firm. This can occur where firms use multiple systems, for example, the time of execution recorded from the trade execution system is recorded ahead of the time of receipt taken from the order management system.

Members should review NASD Rule 6953 regarding clock synchronization and the clock synchronization procedures in Section 2 of the OATS Reporting Technical Specifications.

Conclusion

The NASD Market Regulation Department uses among other things, automated surveillance systems to surveil for compliance with the OATS Rules. When firms incorrectly report required data, it impedes the Market Regulation Department's ability to effectively recreate the order audit trail. Additionally, these types of errors can cause a significant waste of the NASD's regulatory resources and the firm's resources in responding to unnecessary inquiries.

Please be advised that when Market Regulation's automated systems identify firms as not complying with the OATS Rules based on incorrectly reported values, the staff may bring a disciplinary action for violation of the OATS Rules. Such violations will be resolved by imposing appropriate sanctions to address the seriousness of the violation. Member firms are urged to review their systems and procedures to ensure that they are reporting the data appropriately.

If you have any questions about these topics please call (800) 321-NASD.