Order Audit Trail System (OATS)

What Is the Order Audit Trail System (OATS)?

The Order Audit Trail System (OATS) is an automated computer system established by the Financial Industry Regulatory Authority (FINRA). It is used to record data relating to orders, quotes, and other related trade data from all equities traded on the National Market System (NMS), including over-the-counter (OTC) stocks. This system simplifies an order's progression from the initial receipt of the order to its eventual execution or cancellation, for easy tracking or auditing purposes.

Understanding the Order Audit Trail System (OATS)

A audit trail is a step-by-step record by which accounting, trade details, or other financial data can be traced to its source. Audit trails are used to verify and follow many types of transactions remembering accounting transactions and trades for brokerage accounts.

FINRA established OATS to ensure that the time-sensitive data relating to the order execution process is recorded accurately. This permits FINRA to monitor the trading practices of member firms, which are required to capture and report trade data to OATS. Traders and investors are not required to submit OATS data. This is the job of the broker or the member firm of FINRA.

Part of this process is requiring that all member firms synchronize their business, computer, system, and time-stepping clocks to keep away from errors or issues related to inaccurate times associated with orders.

Assuming a firm struggles with recording or presenting all the data that OATS requires, the firm can hire an outsider to present the data on their behalf. This is a special arrangement, as OATS recording may not be handled by the clearing firm the firm uses. The Securities and Exchange Commission (SEC) approved these rules on March 6, 1998.

OATS Reporting Procedures

Regulations require firms to submit daily electronic OATS reports to FINRA . OATS reports must be made the same day an order was received or on the day data becomes available to the firm. Daily electronic OATS reports can be made for single or multiple orders. Data collected on the OATS report includes:

• Order identifier.
• Identification of the security being traded.
• Market participant symbol or identifier.
• Terms of the order, like buy, sell, sell short, the price, the number of shares, account type, and order type, for example.
• Date and time the order originated.

In total there are 21 requirements that must be recorded under Rule 7440.

OATS data must be preserved for something like three years. During the initial two years, the data must be in an accessible place in case it needs to be reviewed.

CAT versus OATS

The Consolidated Audit Trail (CAT) under SEC Rule 613 is presently the required system for tracking trades beginning to end.

As indicated by Deloitte, CAT "isn't just OATS on steroids". It includes substantial extra requirements, like options data, allocations, and customer data. These new data sets might require firms to rethink their target reporting architectures. Furthermore, unlike OATS, the CAT has no exemptions to these reporting requirements.

Example of an Order Audit Trail in real life

One of the purposes of OATS, and the CAT system, is to monitor for suspicious behavior. Because of the data that is recorded, the people undertaking the suspicious activity are easier to find.

A huge case occurred on May 6, 2010, when an informal investor "spoofed" the S&P 500 E-mini market. He used an automated program that started a cascading type of influence of sell orders which led to a flash crash on that day.

In 2015 the man responsible, a London resident, was gotten and arrested. In 2016 he pleaded blameworthy to spoofing and wire fraud.

While a number of parties were involved in giving testimony and evidence, and this case involved futures, not stocks, it shows the importance of order audit trails and financial oversight. The regulators were able to see that Navinder Singh Sarao, the man responsible, put out huge orders hundreds of times, without any intention of being filled on them; yet rather for the sole purpose of controlling the market in his preferred direction.

Order audit trail systems — whether OATS, CAT, or some other regulator requirement — provide evidence and data for regulators in such cases.

Features

• Individual traders and investors are not required to provide OATS data to FINRA. This is the job of the broker or member firm dealing with client orders.
• The order audit trail system (OATS) is a computerized regulatory mechanism that keeps up with detailed records of securities transactions.
• OATS was established so that orders could be more easily tracked and reviewed if necessary; for instance, on account of a trading error or suspected market manipulation.
• OATS requires member firms of FINRA to record and report orders to FINRA naturally.