Execution Compliance and Surveillance Service (ECS)

ECS is a web-based trade surveillance tool designed to identify certain market abusive activity (including spoofing/layering), determine execution quality and monitor compliance with best execution and related Reg NMS requirements.

ECS is module based, which allows it to be customized to best fit a firm’s needs. Modules are aimed at:

  • Fraud-based activity including spoofing/layering, marking the close, wash sales and manipulating the open.
  • Providing National Best Bid/Best Offer (NBBO) analysis, illustrating trades that are at, inside, or outside the NBBO
  • Monitoring compliance with the SEC’s Order Protection Rule (Rule 611) including ISO order routing and quote analysis
  • Demonstrating compliance with amendments to Reg SHO, which restricts prices at which a stock can be sold short
  • Highlighting transactions subject to the Limit Up – Limit Down rule, which prohibits orders from being executed during a trading pause or outside upper and lower price-bands in effect at the time of execution
  • Reporting for dealers and market makers to meet 605/606 requirements

Beyond a compliance tool, ECS is used by broker dealers as well as investment managers to monitor and measure the effectiveness of their order routing strategies and evaluate the performance of their execution service providers.

Along with the modules more fully described below, ECS provides clients with the ability to:

  • Create custom, ad-hoc reports
  • Add notes to specific transactions and identify the reviewer, follow-up, etc.
  • Sort all data by execution venue, symbol, or side
  • Search through transactions to locate specific orders received over the span of one or more days, and all executions and cancels associated with that order
  • Establish user defined time parameters for quote analysis (0-5000 milliseconds)
  • Download reports as either Excel or CSV files for further analysis or local storage

ECS Modules

Market Abuse Monitoring
ECS contains several scenarios to identify activity that may be deemed manipulative.  In their 2016 Regulatory Priorities Letter, FINRA indicated that they will begin to deliver compliance report cards to firms focused on spoofing and layering.  ECS currently covers spoofing/layering as well as the following, additional scenarios with respect to manipulation:

  • Spoofing/layering - using one or multiple orders to give the appearance of interest on one side of the market which facilitates execution of an order(s) on the opposite side of the market, followed by cancellation of the remaining orders.  Our service looks for this behavior with both general and specific criteria.
  • Marking the close - using one or multiple trades to artificially increase or decrease the closing price for a security.  Our service takes into account varying liquidity levels and other market activity to highlight potential exceptions.
  • Manipulating the open - entering one or multiple non-bona-fide orders on one marketplace to influence the market for a security, subsequently trading in an away market and then canceling the initial orders.  Our service will highlight potential instances based upon a specific pattern of behavior occurring pre-open.
  • Wash sales - buying and selling the same security at the same time, same price and for the some beneficial owner.  Our service will highlight potential exceptions based upon the account identifying information provided by the firm. 
Best Execution for Fixed Income Securities

Partnering with a leading fixed income data vendor that provides continuous evaluated pricing of corporate and municipal bonds, ECS provides exception reporting to identify any transactions in such securities where the execution price is not within an acceptable range of the continuously evaluated price at the time of execution.  Users of the systems will have the capability to define the parameters of the acceptable range for their firm.  This will include corporate and municipal bonds.

The ECS reports will contain the following:

  • A graphical summary of your firm’s daily fixed income executions that resulted in exceptions and the number of exceptions in each category relative to a benchmark (sector, issuer, issue, etc.).
  • The trade specific detail, including counterparty, as well as reference statistics regarding liquidity and transaction cost analysis (TCA).
  • Ability to sort the data by asset class, CUSIP, side or counterparty.

NBBO Analysis
FINRA Rule 5310 states, “In any transaction for or with a customer or a customer of another broker-dealer, a member and persons associated with a member shall use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions."

ECS reports, calculated in a manner consistent with the provisions of applicable rules, include:

  • A graphical summary of your firm’s daily executions relative to the NBBO - At, Inside, Outside, Other. The Other category includes trades where the bid/ask is zero, one-sided, or crossed.
  • A detailed, trade by trade analysis of the day’s executions vs. the NBBO at the time of the trade.
  • Ability to sort the data by category (At, Inside, Outside, Other) as well as venue, symbol, or side.

Order Protection Rule
The Order Protection Rule (Rule 611) requires any broker-dealer that internalizes trades, or acts as an OTC market maker or block positioner to establish, maintain, and enforce written policies and procedures to prevent trade-throughs of protected quotations.

Reports are calculated in a manner consistent with the provisions of the Order Protection Rule, the FAQs and other forms of guidance issued by the SEC from time to time. Reports include:

  • A graphical summary of daily executions identifying all transactions that are compliant, exempt and non-exempt with respect to Rule 611
  • A detailed report of all executions including protected quotes available at the time of the trade
  • A detailed report of all potential trade-throughs, highlighting protected quotes available at the time of execution.

ISO Order Routing and Quote Analysis
Rule 611 requires a broker-dealer to demonstrate that trades have been executed at non-trade-through prices or that the trades qualify for one of the exemptions from the Rule. To claim the Intermarket Sweep Order (ISO) Exemption, the broker-dealer is required to route, simultaneously with the execution of the block trade, an ISO to execute against the full displayed size of any protected quotation with a price superior to the block trade price. In either case, trade prices should be compared with protected quotations at the time of execution, and reliably documented, to affirm that such quotations were not traded through or that the ISOs were routed appropriately.

The ECS ISO Order Routing and Quote Analysis module will evaluate your daily ISOs against your snapped quote data, and optionally compare your quotes with the relevant "Network Data" to determine compliance with Rule 611. ECS will provide a detailed report identifying each ISO as "Compliant," "ISO Invalid," "ISO Mispriced," "ISO Misdirected," "Quotes Invalid," "Quotes Missing" or "Quotes Mismatched".

Regulation SHO Analysis 
The SEC’s Short Sale rule is designed to restrict the prices at which a stock can be sold short. If the price of that security decreases by 10 percent or more from the security’s closing price (as determined by the listing market for the security as of the end of regular trading hours on the prior day), a circuit breaker is triggered for that security. With these amendments to the SEC’s Short Sale rule, policies and procedures must be in place to prevent placement or execution of an order that does not comply with the short sale restriction.
 
Reports are calculated in a manner consistent with the provisions of the Amendments to Regulation SHO (Rule 201), the FAQs and other forms of guidance issued by the SEC from time to time. Reports include:
  • A graphical summary of daily executions identifying all transactions that are marked SS (Sell Short) or SSE (Sell Short Exempt).
  • A detailed report of all stocks for which the 10% Circuit Breaker (“CB”) has been triggered or is in effect.
  • A detailed report of all executions marked SS that are in compliance (no CB in effect).
  • A detailed report of all executions of orders marked SS that are not in compliance (where CB is in effect and there is no indication of a price one tick above national best bid (“NBB”)).
  • A detailed report of all executions marked SSE that are in compliance, noting exemption reason or indicating that price was one tick above NBB.
  • A detailed report of all executions marked short sale exempt (“SSE”) that are not in compliance, when no exemption reason has been noted or if price is not above NBB in effect, based on Network data.

Limit Up-Limit Down
Under the Limit Up-Limit Down rule, all market participants are required to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent trading outside the upper and lower limit bands, when such bands are in effect. Additionally, firms are not allowed to execute orders during any trading pauses in effect due to Limit Up-Limit Down.

The ECS LULD module analyzes what percentage of your firm’s transactions occurred inside, at, and outside the upper and lower price-bands in effect at the time of the execution. In addition, for a security at a given time in the trading day, the upper and lower price-bands, if any, may be displayed.

Rule 605 and 606 Reporting
SEC Rule 605 requires market centers that trade national market system securities to make publicly available monthly electronic reports of execution quality.

J&J will analyze client data and provide reporting as required by SEC Rule 605, which currently requires such reports to include information about each market center's quality of executions on a stock-by-stock basis, including how market orders of various sizes are executed relative to public quotes.  These reports must also disclose information about effective spreads (the spreads actually paid by investors whose orders are routed to a particular market center).

SEC Rule 606 requires broker-dealers to make publicly available for each calendar quarter a report on its routing of non-directed orders in NMS securities during that quarter.

J&J will analyze client data and provide reporting as required by SEC Rule 606, which currently states that broker-dealers that route orders on behalf of customers are required to prepare quarterly reports, with each report divided into four separate sections for securities that are (i) listed on the New York Stock Exchange, (ii) qualified for inclusion on The Nasdaq Stock Market, Inc., (iii) listed on the American Stock Exchange, LLC or any other national securities exchange and (iv) option contracts, with each such section disclosing the following information:

  • The percentage of total customer orders that were non-directed orders, and the percentages of total non-directed orders that were market orders, limit orders, or other orders.
  • The venues to which a significant percentage of total non-directed orders were routed for execution.
  • The percentage of total non-directed orders routed to the venue, and the percentages of total non-directed market orders, non-directed limit orders, and non-directed other orders that were routed to the venue.
  • Terms of the material aspects of the broker-dealer’s relationship with each venue identified above, including a description of any arrangement for payment for order flow and any profit-sharing relationship.

Jordan & Jordan provides public access to the Rule 605 and 606 Services reports (the “”), as well as private, secure access to detailed Rule 605 and 606 data through ECS for on-demand query and analysis.

 

Order Flow Audit Search

The Order Flow Audit Search module allows users to search through all transactions stored in ECS and locate orders received over the span of one or more days. Upon locating an order of interest, all executions and cancels associated with that order may be viewed, as well as any analytics performed on those executions. This tool is useful to support or supplement both internal and external audits.