Sunset of OATS
By Olga Talanova
What is OATS? OATS is the Order Audit Trail System.
What is it’s replacement? Consolidated Audit Trail or CAT for short.
On September 1st, we lost OATS to CAT. It is a huge loss because OATS reporting was a familiar tool that successfully worked for broker-dealer businesses for over a decade. Since its release in March 21, 2007, OATS became the reporting feature that was a must for trading companies to comply with. Effective since June 2007, and until August 31, 2021, OATS reporting was a big item that assured conformance with the FINRA rules. Thus, OATS era ended for the firms that received and/or handled securities publicly.
Since September 1st, 2021, the OATS reporting requirement has been deleted from the FINRA rulebook. OATS was replaced because of the greater accuracy and reliability that are provided by its successor CAT. Losing OATS to CAT sounds like a huge loss, right? Let’s take a deeper look.
What OATS Served for?
With OATS, all businesses that trade publicly needed to register their trades before 8 am EST the next day after the trade was made. There was no rush to synch the transactions immediately, and businesses had a chance to complete their trades, reporting to OATS at night or early morning the next day. This timing requirement applied only to the companies that were obligated by FINRA to be precise in time about their transactions. However, all public trades needed to be OATS-compliant, except for orders originated by a trading desk in the ordinary course of a member's market making activities.
The last OATS Business Day according to the Rule 7450(b)(3) was August 31, 2021, so businesses are ending their workweek without OATS. No more recording of the order events, no more performing of the routine processing for OATS. The reporting process is now free from incorporating corrections and repairing rejections. While all businesses, companies, and firms that handled transactions in NMS and OTC equities had to list securities and report their actions to OATS, the loss of the last one is the step towards the change in the industry.
What Caused the Fall of OATS?
The fall of OATS reporting began after the May 2010 Flash Crash when the flash crash of the US stock market happened, disrupting the trillion-dollar stock market. The market crash was triggered by Sarao's trading algorithm that executed a number of large selling orders of E-Mini S&P contracts, which brought stock market prices down in a flash. The crash lasted for 36 minutes but it was enough to endanger the effectiveness of OATS reporting as a safe and transparent compliance reporting tool. The regulators noted the liquidity was disappearing, which caused the crash. After the 2010 market crash, the high-frequency traders left and the liquidity increased, but the understanding that OATS needed to be fixed persisted.
The Successor
However, this does not mean that the businesses are free from registering their order events. The businesses still need to report all order events that took place before August 31, 2021 to OATS. While OATS has already gone from the horizon, there is its successor CAT, and the reporting should be done with this tool.
I cannot say we are going to miss OATS, it is like a chapter of the financial reporting gone and another chapter is starting. CAT is going to continue the job of OATS. According to the rule 613 of the SEC, national securities exchanges and associations should be monitored by the Consolidated Audit Trail (CAT). The idea is to track the entire life cycle and all activity in U.S. equity and listed options markets effectively and accurately.
Differences between OATS and CAT
| OATS | CAT | |
|---|---|---|
| Which securities are reportable? | NMS and OTC equity securities | All NMS securities (i.e., listed equities and options) and over-the-counter equity securities |
| What are the exceptions? | Initial public offerings (IPOs), secondary offerings, Direct Participation Programs (DPPs), "restricted securities", as defined by SEC Rule 144(a)(3) under the Securities Act of 1933, and any securities designated in the PORTAL Market are not reportable to OATS. | NO exceptions All activity in eligible securities throughout the U.S. markets. |
Takeaway
While OATS is gone, we now have CAT enforced by the SEC. With CAT:
- Reporting applies to more securities
- Transparency is higher
- The entire life cycle of order handling by broker-dealers is tracked
It is not a kind of OATS on steroids but a more substantial reporting system.
After OATS deceased, the Consolidated Audit Trail (CAT) under the SEC Rule 613 is now the official system for tracking trades broker-dealers during the entire life cycle.
Used links:
- https://www.catnmsplan.com/sites/default/files/2020-02/updated_oats_cat_gap_analysis.pdf
- https://www.thinkadvisor.com/2021/06/21/finra-retires-oats-to-make-way-for-cat/
- https://www.catnmsplan.com/sites/default/files/2020-04/4.21.20%20CAT%20Reporting%20Technical%20Specifications%20for%20Industry%20Members%20-v3.1.0%20r2-%20CLEAN.pdf