Phase 3 Firms: Compliance Check

October 30, 2003

 

OATS Phase 3 reporting of manual orders has not yet been approved by the SEC. NASD, however, is reminding firms that have previously submitted an OATS Subscriber Initiation and Registration Form ("SIRF") indicating that they are Phase 3 firms to periodically review their business model and order handling processes to ensure they continue to qualify as a Phase 3 firm. If at any time a member currently registered as a Phase 3 reporting firm begins to receive and handle orders that would qualify for OATS reporting under Phase 2, they must immediately update their OATS registration and begin transmitting data to OATS. Firms that do not update their registration and fail to submit required data to OATS will be subject to disciplinary action.

 

Compliance with OATS Rules was implemented in phases. Phase 1, implemented in March of 1999, requires events in the lifecycle of electronic orders handled by market makers and ECNs to be reported to OATS. Phase 2, implemented in August 1999, requires events in the lifecycle of electronic orders handled by all member firms to be reported to OATS. Electronic orders are defined as orders received or captured via an electronic order routing or execution system.

 

Phase 3 was originally targeted for implementation on July 31, 2000. The actual implementation date has been postponed indefinitely pending SEC approval. Phase 3 will require events in the lifecycle of manual orders to be reported to OATS. Manual, or non-electronic, orders are defined as orders captured by a member firm in some way other than in an electronic order routing or execution system, such as a paper ticket.

 

Some factors to consider while determining your firm's obligations:

 

For non-market makers:

 

  • If your firm uses an electronic order routing or execution system provided by a clearing firm to route orders directly to the clearing firm for handling, those orders are reportable under Phase 2 by the clearing firm and under Phase 3 by your firm.
     
  • If your firm uses an electronic order routing or execution system provided by a clearing firm to route orders directly to other market centers for execution, those orders are reportable under Phase 2 by your firm.

  • If your firm enters orders for handling or execution in a non-NASD member's electronic system (i.e. a service bureau's electronic system) for routing or execution to another NASD member firm for handling or execution, your firm is required to report order events to OATS under Phase 2.

  • If your firm uses a member firm's electronic order routing or execution system to route orders for execution by that same member firm, your firm is not required to report the order events to OATS until Phase 3 is implemented.

  • If after an order is executed, your firm enters the order data into an electronic system for clearance and settlement, your firm is not required to report the order events to OATS until Phase 3 is implemented.


For market makers:

 

  • If your firm receives any orders via an electronic order handling or execution system at the trading desk, your firm is required to report the order events to OATS under Phase 1.

  • If your firm captures any orders via an electronic order handling or execution system at the trading desk, your firm is required to report the order events to OATS under Phase 1.

  • If, after an order is executed, your firm enters order data into an electronic system for clearance and settlement, your firm is not required to report the order events to OATS until Phase 3.


If you are unclear in whether your firm has an obligation to report to OATS, or have questions on OATS in general, please contact NASD's Market Regulation Department at (240) 386-5126.


 

Last Updated: 10/30/2003