OATS Reporting Obligations for Agency Orders
June 22, 2005
NASD is providing additional guidance on OATS reporting obligations when handling customer orders on an agency basis. Members generally must record and report to OATS a Route Report when handling an order on an agency basis.1 There are limited exceptions to this requirement. First, when a member handles an agency order on an average price basis, members are required to show the receipt and execution of the customer order by reporting a New Order Report and an Execution Report to OATS, with the time of execution reflected as the time at which the average price of the agency execution was determined.2
Second, as described in more detail in Notice to Members (NtM) 01-85 (December 2001), when members trade on a "mixed" capacity basis, members may under certain circumstances report an Execution Report, rather than a Route Report, to OATS using the Reporting Exception Code of "M"3 to allocate the components of a mixed capacity execution into its individual parts.4 The OATS reporting guidance provided in NtM 01-85 was not intended to apply to situations in which a member was initially able to report the correct capacity to ACT, such as when allocating multiple single capacity executions among multiple customer accounts.
Finally, to the extent that the decision to allocate shares to a particular customer account occurs after a trade is executed, members also should record and report to OATS a New Order Report and an Execution Report, rather than a Route Report. NASD is aware that members engage in various trading strategies that result in these types of post-execution allocations to multiple customer accounts, such as when a member is simultaneously working multiple agency orders. In these situations, it may be that a member knows which customer orders it is attempting to execute, but may not know which accounts will ultimately receive shares from such resulting execution, or what portion of the execution each account might receive. Thus, in situations where a member holds multiple orders to which shares are allocated after an execution occurs, the member should record and report to OATS an Execution Report at the time the shares are actually allocated to each individual customer order. Additionally, the time of execution reported to OATS should reflect the time the firm allocated the shares to the specific customer order. Because there will be no corresponding ACT or TRACS report to match against these Execution Reports, members should append a Reporting Exception Code of "T" to each such Execution Report.
NOTE: The Reporting Exception Code of "T" is currently available in OATS production. Members should begin using this code as soon as possible, but no later than September 1, 2005. After September 1, 2005, members that fail to report post-trade allocations as prescribed above, including the proper use of the Reporting Exception Code "T", may be deemed to be in violation of the OATS Rules.
Members are reminded, however, that in situations where there is no actual post-execution allocation (e.g., where a member is holding one agency order that is properly transmitted and reported as such), the member must record and report a Route Report to OATS as provided for in the OATS rules when an order is transmitted to another member for handling or execution.5 For example, a Route Report would be required where a member was holding only one customer order and was able to transmit the order to a market center properly marked as agent, even though any resulting executions must later be "allocated" to the customer account because the member's internal system does not directly interface with the system by which the order was routed.
Questions and Answers
Question 1: A member receives three separate customer orders in ABCD at the same price. The member sends one larger order, properly marked as agency, to the Nasdaq Market Center or another market center in an attempt to obtain an execution for these three orders. The member holds the individual customer orders and never gives up control of these orders to any other broker/dealer or market center. Upon receipt of an execution of the larger order (which is properly reported to ACT with a capacity indicator of agency), the shares are recorded in an agency allocation account. Later that day, the member allocates the shares from the agency allocation account to the individual customer accounts based upon a predetermined allocation methodology. How should these orders and related executions be reported to OATS?
Because the three customer orders were not sent outside of the member for execution, and were not executed until the firm allocated shares from its agency allocation account, the member should report a New Order Report and Execution Report with a Reporting Exception Code of "T" for each individual customer order. The Execution Time field on the Execution Report should reflect the time the shares were allocated to each individual customer account. A Route Report for each customer order should not be reported in this scenario since the member did not route the order away for execution and the individual customer orders were not executed until the shares were allocated to the specific customer accounts.
Question 2: A member receives an agency order to buy 1,000 shares. Using a third party's order routing software, the member sends an order to an Electronic Communication Network (ECN) for 1,000 shares to satisfy this customer order. Because the member's in-house order management system (OMS) does not interface with the third party's order routing software, it must manually move the shares received from the ECN execution to the customer's account at the member. The ECN properly reported the member's capacity as agent to the applicable market center. How should this order be reported to OATS?
Because, the member knew that any resulting execution from the ECN order would automatically be allocated to the one customer order it was holding, the firm is required to record and report to OATS a New Order and a Route Report. In this scenario, there is no post-execution allocation of the shares because the member was holding only one order, for whose benefit the member accessed the ECN. In this instance, technology interface limitations are not a factor in determining the appropriate OATS reporting methodology to be followed.
Should you have any question regarding this OATS Report, or on OATS in general, please contact the OATS Help Desk at 1-800-321-NASD.
1 NASD Rule 6954(c) requires that certain information be recorded when a member transmits an order to another member. More specifically, the OATS Reporting Technical Specifications, Section 4.2.2 requires that whenever a member transmits an order to another member, ECN, non-member or Nasdaq Execution System for handling or execution, the routing member must send a Route Report. While these reporting requirements do not specify the capacity that a member is acting in, the fact that a specific customer order is transmitted to another member is interpreted as that member acting on behalf of the customer as agent. By contrast, a member that fills a customer's order by acting in a riskless principal capacity would retain and not transmit the customer order, and instead would send its own proprietary order to another market center to acquire/sell the shares (as principal) that will be used to offset the customer's order (as riskless principal).
2 See OATS FAQ C62
3 See NtM 01-85 (December 2001), at Question 20, Orders Entered on Behalf of A Customer For Execution
4 NtM 01-85 was issued to address "mixed capacity executions" (i.e., situations in which a single trade execution is allocated to multiple customer and proprietary accounts for which the member was acting in various capacities, such as agent and riskless principal). This situation is distinct from "executing an order in multiple capacities" (i.e., situations in which a single order is filled by a member through two or more partial executions of the order while acting in multiple capacities, such as agent and riskless principal).
5 See NASD Rule 6954(c) and the OATS Reporting Technical Specifications, Section 4.2.2
