Study guide
Function 2 of the FINRA outline, Maintaining Books and Records, Trade Reporting and Clearance and Settlement, contributes 9 of the exam's 50 scored questions, and they tend to be precise: which facility, which clock, which deadline. This chapter walks through the reporting plumbing that follows every execution, the audit trail behind it, and how trades ultimately settle.
Where Trades Get Reported: TRF, ORF, and the 10-Second Rule
Every over-the-counter trade in an equity security must be reported to a FINRA facility so the tape reflects it. Trades in NMS stocks executed otherwise than on an exchange go to a trade reporting facility, or TRF; FINRA operates TRFs in partnership with Nasdaq and NYSE, and members choose which to use. Trades in OTC equities, meaning non-NMS securities such as those quoted on OTC Markets, go to the OTC Reporting Facility, the ORF, under Rule 6622, while ADF participants report through the ADF under the 6280 series. The governing rules for the TRFs are 6380A and 6380B, and the headline requirement is speed: trades executed during reporting hours must be reported as soon as practicable, and no later than 10 seconds after execution. Only one party reports for the tape. Between two members, the executing party reports, generally the member that receives the order against its quote or otherwise completes the trade; in a trade between a member and a non-member or customer, the member reports. Reports carry the price, size, security, capacity, and applicable trade modifiers: trades executed outside normal market hours carry an outside-hours designator, late reports are flagged as late, and trades reported the following day are submitted on an as-of basis. Not every submission prints to the tape. Non-tape reports, submitted for regulatory or clearing purposes, cover situations like the second leg of a riskless principal transaction, which is not reported to the tape again because the market already saw the first leg. If Kestrel Trading buys 2,000 shares to fill a customer order it already holds, one tape report and one non-tape regulatory report tell the whole story.
The Consolidated Audit Trail and Clock Synchronization
The Consolidated Audit Trail, or CAT, is the regulatory database that records the full life cycle of every order in NMS securities and OTC equities, replacing the older OATS system. Under FINRA's 6800 rule series, industry members must record and report each reportable event: the origination or receipt of an order, its routing to another firm or venue, any modification or cancellation, and its execution, each with the time of the event. Reports are generally due to the CAT central repository by 8:00 a.m. Eastern time on the trading day after the event, and firms must repair reporting errors promptly within the prescribed correction window. CAT also links orders to customers through separately submitted customer identifying information, which is what gives regulators the ability to reconstruct who was behind trading across every venue at once. None of this works if firm clocks disagree, which is why FINRA Rule 4590 requires members to synchronize the business clocks they use to record times for reportable events. Computer system clocks that capture time in milliseconds generally must stay within 50 milliseconds of the time maintained by the National Institute of Standards and Technology, while mechanical time-stamping devices and clocks recording in seconds must stay within one second. Firms must synchronize at least daily before the market opens, keep a log of synchronization and of any drift outside tolerance, and retain those records. A one-second discrepancy sounds trivial until you remember that the reporting standard for a tape print is 10 seconds and executions are measured in microseconds; audit trails are only as good as the clocks that stamp them.
Large Traders, Execution Quality Reports, and Routing Disclosures
SEC Rule 13h-1 gives regulators a directory of the market's biggest participants. A large trader is a person whose transactions in NMS securities reach 2 million shares or 20 million dollars in any calendar day, or 20 million shares or 200 million dollars in any calendar month. A person crossing a threshold files Form 13H with the SEC promptly, receives a large trader identification number, or LTID, and must disclose that LTID to every broker-dealer effecting its transactions; those broker-dealers must record the LTID with the account, capture execution times, and monitor for customers whose activity suggests they should have registered but have not. Two disclosure rules round out transparency about execution quality. Rule 605 requires market centers to publish monthly, standardized reports on execution quality, covering measures such as effective spreads and speed of execution; amendments adopted in 2024 substantially expand the rule, including coverage of larger broker-dealers with 100,000 or more customer accounts and finer time measurements, with compliance extended to August 2026, so confirm the current state of implementation as you study. Rule 606 requires broker-dealers to publish quarterly reports on where they routed held customer orders, including the venues used, any payment for order flow received, and profit-sharing arrangements; on request, a customer is entitled to a report identifying where that customer's own orders were routed for the prior six months and whether they were directed or non-directed. Finally, FINRA Rule 5340 prohibits pre-time stamping: an order memorandum must be stamped when the order event actually occurs, and stamping a ticket in advance falsifies the record and can disguise trading ahead of the customer.
Confirmations: SEA Rule 10b-10 and FINRA Rule 2232
A customer is entitled to a written record of every trade. SEA Rule 10b-10 requires a broker-dealer to give or send the customer a confirmation at or before completion of the transaction, which means by settlement. The confirmation must identify the security, the quantity, the price, and the trade date, and disclose the capacity in which the firm acted: as agent for the customer, as agent for another person, as agent for both sides, or as principal for its own account. When the firm acts as agent, the confirmation must state the commission; when it acts as principal in certain riskless capacities for equity securities, markup disclosure applies as well. The confirmation must also state whether the firm receives payment for order flow and that the source and nature of the payment will be furnished on request, and the time of execution must be furnished on written request if not shown. Debt confirmations carry additional content such as yield and call features. FINRA Rule 2232 layers member-specific requirements on top: the confirmation must disclose whether the firm is a market maker in the security, and for corporate and agency bond trades with retail customers where the firm traded as principal on the same day, the firm must disclose its markup or markdown measured from the prevailing market price, the execution time, and a reference to publicly available trade data. A practical example: when Halloway Capital sells Ana 200 shares from inventory, her confirmation must say principal, show the price, and disclose Halloway's market maker status in the stock; if the firm had acted as her agent, the stated commission would appear instead.
Settlement: T+1, the Uniform Practice Code, and OCC Exercise and Assignment
SEA Rule 15c6-1 sets the standard settlement cycle, and since May 2024 that standard has been one business day after the trade date, T+1, for most securities including equities, corporate bonds, ETFs, and listed options premium obligations through their clearing systems. Parties can expressly agree to a different settlement at the time of the trade, and certain transactions, such as some firm commitment offerings priced late in the day, follow their own timetables. FINRA's Uniform Practice Code standardizes the mechanics between members: good delivery requirements, ex-dates, don't know procedures for resolving uncompared trades where one side does not recognize the transaction, and close-out procedures under which a buyer who has not received securities can, after notice, buy in the position for the account of the failing seller. Ex-dividend dates flow from the settlement cycle. With T+1 settlement, the ex-date for a regular cash dividend generally falls on the same business day as the record date, because a purchase the day before record settles on the record date itself and carries the dividend; for large distributions of 25 percent or more, the ex-date is generally deferred until after the payable date. On the options side, exercise and assignment run through the Options Clearing Corporation. A holder exercises through the clearing member, the OCC randomly assigns a clearing member carrying a short position, and that firm allocates among its customers by random lottery or first-in-first-out under a disclosed, fair method. At expiration the OCC automatically exercises equity options in the money by at least one cent unless contrary instructions arrive by the cutoff. The stock delivery resulting from an equity option exercise settles on the regular-way cycle.
Key terms
- Trade reporting facility (TRF)
- — A FINRA facility, operated with Nasdaq or NYSE, through which members report over-the-counter trades in NMS stocks under Rules 6380A and 6380B.
- OTC Reporting Facility (ORF)
- — The FINRA facility for reporting trades in OTC equity securities, that is, non-NMS stocks, under Rule 6622.
- 10-second reporting requirement
- — The obligation to report OTC trades as soon as practicable and no later than 10 seconds after execution during reporting hours.
- Executing party
- — The member responsible for the tape report in a trade between members; when a member trades with a non-member or customer, the member reports.
- Non-tape report
- — A submission made for regulatory or clearing purposes that does not print to the tape, such as the second leg of a riskless principal transaction.
- Consolidated Audit Trail (CAT)
- — The central repository, governed for members by the FINRA 6800 series, recording every order life-cycle event in NMS securities and OTC equities, generally reportable by 8:00 a.m. Eastern the next trading day.
- Clock synchronization (Rule 4590)
- — The requirement to synchronize business clocks to NIST time, generally within 50 milliseconds for computer clocks capturing milliseconds and within one second for other time-stamping devices, with logs retained.
- Large trader (Rule 13h-1)
- — A person trading 2 million shares or 20 million dollars in NMS securities in a day, or 20 million shares or 200 million dollars in a month, who must file Form 13H and give the resulting LTID to its broker-dealers.
- Rule 606 report
- — The quarterly broker-dealer disclosure of order routing venues, payment for order flow, and profit-sharing arrangements, plus customer-specific routing detail for six months on request.
- Pre-time stamping (Rule 5340)
- — The prohibited practice of stamping an order memorandum before the order event actually occurs, which falsifies records and can conceal trading ahead.
- T+1 settlement (15c6-1)
- — The standard settlement cycle of one business day after trade date, in effect since May 2024 for most securities, unless the parties expressly agree otherwise at the time of the transaction.
- Exercise by exception
- — The OCC expiration procedure that automatically exercises equity options in the money by at least one cent unless the holder submits contrary instructions by the cutoff; assignment passes randomly to a short clearing member, which allocates by a fair disclosed method.
Exam tips
- Match the security to the facility before anything else: NMS stocks traded off-exchange print to a TRF, OTC equities print to the ORF, ADF participants use the ADF, and in every case the deadline during reporting hours is 10 seconds.
- Riskless principal questions usually test reporting: one tape print for the market-facing leg, one non-tape regulatory report for the customer leg, never two tape prints.
- Memorize the paired clock tolerances of Rule 4590, 50 milliseconds for millisecond-capable computer clocks and one second for other devices, and the CAT deadline of 8:00 a.m. Eastern on T+1.
- The 13h-1 thresholds come in daily and monthly versions, 2 million shares or 20 million dollars in a day versus 20 million shares or 200 million dollars in a month; the monthly figures are exactly ten times the daily ones.
- Settlement changed to T+1 in May 2024, which also moved the regular-way ex-dividend date to generally coincide with the record date; older study materials describing T+2 mechanics are out of date.