OATS Report - March 3, 2003

March 3, 2003

The use of OATS Cancel Reports has increased over 210% from January 2002 to January 2003. As a result, NASD is publishing this article to remind firms that Cancel Reports should only be used when a customer or firm completely or partially cancels an order. The submission of a Cancel Report for any other reason may be deemed a violation of the OATS Rules.

NASD finds that firms may be incorrectly reporting Cancel Reports in the following situations:

1. Sending Cancel Reports for Expired Limit Orders—When a limit order expires no Cancel Report is necessary. NASD is able to determine that the order has expired based on the Time in Force Code on the New Order Report.

2. Sending a Cancel Report when Canceling a Route—Firms should not submit a Cancel Report to reflect the cancellation of a route to another firm.

a. If a firm cancels the routing of an order to another firm, then the routing firm should notify the receiving firm of the cancellation. Only the receiving firm should submit a Cancel Report. The routing firm should not submit a Cancel Report.

b. If a firm cancels the routing of an order to SelectNet or SuperMontage, the firm should not submit a Cancel Report since the cancellation will be reflected in either SelectNet or SuperMontage.

3. Sending a Cancel Report in Order to Correct an Error—NASD finds that in some instances when firms enter an order in error they are improperly submitting a Cancel Report to show that there was an error in the original submission. Firms that erroneously submit a report to OATS should correct the error by using a Correction Report. The Correction Report shows that the order remains live, but was corrected for OATS reporting purposes by the firm. In this instance a Cancel Report would be inappropriate since the customer has not canceled the order.

Cancel Reports are only to be used when an order is cancelled. NASD strongly recommends that firms modify their systems to ensure that they are not generating Cancel Reports for incorrect reasons. Firms are advised that improperly submitting a Cancel Report could result in disciplinary action.

Questions regarding the proper use of Cancel Reports should be directed to the OATS Help Desk at (800) 321-NASD.