OATS Report - March 3, 2003

March 3, 2003

NASD is publishing this article to provide guidance to firms on how to report order events to OATS when using an "intelligent" order routing system. When a firm uses an "intelligent" order routing system, the customer generally grants the firm discretion regarding where to send the order for execution and/or the limit price associated with the order. The venue and/or limit price associated with the order are then determined by the intelligent order routing system according to previously programmed criteria or functionality. Sometimes the intelligent order routing system will also modify the order after it has been routed, typically as a result of changing market conditions.

Consistent with previous guidance provided in OATS Frequently Asked Question C35 relating to modifications to a customer order made by a firm's trader1, modifications made by the intelligent order routing system after an order is sent to an ECN would not be required to be reported to OATS if the destination/venue to which the order was routed reports all such modifications to OATS. For example, if Firm A uses an intelligent order routing system, which determines to route an order to an ECN that has OATS reporting responsibilities, Firm A would be required to record and report to OATS a New Order Report and a Route Report to the ECN. If the intelligent order routing system later determines to change the limit price of the order routed to the ECN, no additional OATS reports would be required by the firm using the intelligent order routing system, if the ECN receiving the order is reporting all such subsequent modifications to OATS. However, if the venue to which an order is routed does not report such modifications to OATS, the firm would be required to report such modifications to OATS.

The following guidelines should be used for the reporting of system-generated routes, modifications or cancellations to ECNs or market makers that report subsequent modifications or cancellations to OATS:

Each receipt of a customer order that is handled by an "intelligent" order routing system must be reported using an OATS New Order Report.
Each initial route to an ECN or market maker must be reported using an OATS Route Report.
Each system-generated cancellation of an order previously routed to an ECN or market maker would not require a Cancel Report if the ECN or market maker is reporting the cancel to OATS. The originating firm, therefore, would not be required to report the cancel to OATS.
Each system-generated cancel/replace (such as price changes) of an order previously routed to an ECN or market maker would not require that the originating firm submit a Cancel/Replace Report and subsequent Route Report, provided that the ECN or market maker is reporting the cancel/replace to OATS.

The following guidelines should be used for the reporting of system-generated routes, modifications or cancellations to SuperMontage, which provides certain information to OATS:

Each receipt of a customer order that is handled by an "intelligent" order routing system must be reported using an OATS New Order Report.
Each initial route to SuperMontage must be reported using an OATS Route Report with a routing method code of "U".
Each system-generated cancellation of an order previously routed to SuperMontage would not require a Cancel Report because SuperMontage provides that information to OATS.
Each software-generated cancel/replace (such as price changes) of an order previously routed to SuperMontage would require that the originating firm submit to OATS a Cancel/Replace report and subsequent Route report reflecting the new terms and conditions of the order.

The following guidelines should be used for the reporting of system-generated routes, modifications or cancellations to venues that do not report to OATS (e.g., non-NASD members or exchanges):

Each receipt of a customer order that is handled by an "intelligent" order routing system must be reported using an OATS New Order Report.
Each initial route to the non-OATS reporting venue must be reported using an OATS Route Report with a routing method code of "M".
Each system-generated cancellation of an order previously routed to a non-OATS reporting entity would require a Cancel Report.
Each system generated cancel/replace (such as price changes) of an order previously routed to a non-OATS reporting venue would require the originating firm to submit to OATS a Cancel/Replace report and subsequent Route report reflecting the new terms and conditions of the order.

It is important to note that an underlying assumption to the guidelines described above is that the software, not the customer, is making changes to the order. If the customer requests the changes to the order, then the originating firm and the destination/venue to which the order is routed, if applicable, must submit the appropriate reports.

Example 1: Routing to a Member ECN or Market-maker

Firm A receives a market order to buy 1,000 shares of ABCD. Firm A's "intelligent" order routing system routes the order to ECN1 with a limit price within a certain percentage of the inside market. Firm A's system changes the limit price each time the inside market changes.

Firm A is required to report the receipt of the order from the customer and its routing to the ECN. The following OATS reporting would be required:

Firm A

NW Buy 1,000 at market
RT to ECN1

ECN1 will then report to OATS the receipt of the new order along with all subsequent modifications to the order (e.g., ECN1 will submit a Cancel/Replace Report each time the limit price of the order is modified). Since ECN1 will be reporting all of the subsequent price modifications to OATS, Firm A would not be required to submit any additional reports to OATS.

ECN1

NW Buy 1,000 shares at $9.5
C/R Buy 1,000 shares at $9.6
C/R Buy 1,000 shares at $9.7
C/R Buy 1,000 shares at $9.8
EX 1,000 shares

If the order is not executed by ECN1, Firm A's system may cancel the order at ECN1 and route it to another venue, for example to ECN2. Firm A would then be required to submit a Route Report indicating the new destination where the order was routed. ECN1 will report a cancel to OATS reflecting the cancellation of the order by Firm A. Since Firm A's customer did not cancel the order, Firm A is not required to submit a Cancel Report to OATS when its system cancels the order at ECN1.

Firm A

NW Buy 1,000 shares at limit price $9.5
RT to ECN 1

ECN1

NW Buy 1,000 shares at market
CL Cancel

Firm A

RT to ECN 2

ECN2

NW Buy 1,000 shares at $9.5
C/R Buy 1,000 shares at $9.97
EX 1,000 shares

Example 2: Routing to a Non-Member

Firm B receives a limit order to buy 2,000 shares of XYZT at $17.2. Firm B's "intelligent" routing system routes the order to Non-Member 1 with a limit price within a certain percentage of the inside market. Firm B's system changes the limit price each time the inside market changes and sends it back to Non-Member 1. After a few modifications, the system sends the order to ECN1, which finally executes the order.

Firm B is required to report the receipt of the order from the customer, its route to the non-member, each modification of the order and subsequent route to the non-member and finally, the route to the member ECN which in turn must report the receipt, modification and execution of the order. The following OATS reporting would be required:

Firm B

NW Buy 2,000 shares at $17.20
RT Routing Method Code "M" for non-member firm
C/R Buy 2,000 shares at $17.30
RT Routing Method Code "M" for non-member firm
C/R Buy 2,000 shares at $17.50
RT to ECN 1

Non-Member 1

No reports

ECN 1

NW Buy 2,000 shares at $17.50
C/R Buy 2,000 shares at $17.70
EX 2,000 shares

Example 3: Routing to SuperMontage

Firm C receives a limit order to buy 5,000 shares of PDQQ at $24. Firm C's "intelligent" routing system routes the order to SuperMontage with a limit price within a certain percentage of the inside market. Firm C's system changes the limit price each time the inside market changes and sends it back to SuperMontage. After a few modifications, the order is cancelled and the firm submits a new order to buy 10,000 shares of PDQQ to SuperMontage at $24.20.

Firm C is required to report the receipt of the order from the customer, its route to SuperMontage, each modification of the order and subsequent route back to SuperMontage. The following OATS reporting would be required:

Firm C

NW Buy 5,000 shares at $24
RT Routing Method Code "U" for SuperMontage
C/R Buy 5,00 shares at $24.20
RT Routing Method Code ("U") SuperMontage
C/R Buy 5,00 shares at $24.30
RT Routing Method Code ("U") SuperMontage

NW Buy 10,000 shares at $24.50
RT Routing Method Code ("U") SuperMontage

Please call the OATS Help Desk at 1-800-321-NASD with any questions regarding this article or on OATS in general.

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1 In February 1999, the staff published the following FAQ:

C35. Many of our customer orders are routed to an ECN. Although the orders are market orders, they are required to contain a limit price. Our trader modifies the limit price on the orders, as market conditions require, to obtain the best price for the customer. In a fast-moving market, the trader may modify the order many times over a short period. Are we required to submit an OATS report for each of these modifications?

Response: If the modifications to the order are requested by your trader and not by the customer, and if the ECN is reporting each of them to OATS, you are not required to report them to OATS. However, your firm must report all customer-requested modifications to an order by filing a Cancel/Replace Report for each of the modifications.