Stock regulator moving to electronic trade reporting

(January 28, 2005) Look on the bright side. Sure, the new Trade Reporting and Electronic Audit Trail Standards (TREATS) requirements that take effect in two years mean firms will have to send more data to regulators. But they’ll also make on-site audits less burdensome.

“It will allow RS to do more work internally,” said Maureen Jensen of Market Regulation Services (RS) at a conference on Thursday in Toronto. “You will get fewer requests for data.”

Timing is right for the conversion, since all public equity trading is now done electronically in Canada. “It’s time to play catch-up with the rest of the record-keeping,” noted Jensen, vice-president of market regulation for RS’s eastern division.

Specifically, RS will want firms to supply two pieces of data — a trade’s marketplace order number and the client account number. The second piece of data will let the self-regulator reconstruct specific orders. Jensen insists the requirement won’t breach privacy rules because the numbers don’t give identification details.

Providing more data can also be in firms’ best interests, because it will mean requests for information from RS and other regulators will be less frequent. And, when requests are tendered, compliance officers won’t have to produce as many files. Under the current setup, when RS is suspicious about a firm’s activity it must ask for information about 1,000 or more trades to find the two or three transactions it’s concerned about.

Once the audit trail is in place, those requests will become more focused, and in many cases, the SRO will decide it doesn’t need to investigate further. “We’ll be able to dig deeper [on our own] and bother you less often,” said Jensen.

Firms will have to ensure all order information is stored electronically, and the long phase-in period will allow those that still process orders manually to computerize their process, Jensen said.

Canadian firms are being spared the bumpy ride experienced by U.S. securities firms during the National Association of Securities Dealer’s (NASD) introduction of its Order Audit Trail System (OATS) in the late 1990s. OATS was conceived in the wake of the 1997 NASDAQ market scandal and was implemented in phases based on firm size.

The third and final phase, applicable to sole proprietorships and other very small firms, still has not kicked in, largely because many of those operations process order tickets manually and don’t have the technology to file electronic reports.

Filed by Philip Porado, Advisor’s Edge, philip.porado@advisor.rogers.com