Consolidated Options Audit Trail System (COATS)

There is no Cboe rule that defines the audit trail's fields. The duty a trader meets is the systemization requirement and the approval standard for the system used to meet it.

What Is COATS and How Does the Rulebook Reach It?

The exchange has undertaken with other options exchanges to develop a Consolidated Options Audit Trail System (COATS). The rulebook reaches it in three places rather than by defining it.

• Through the order systemization requirement, which fixes when and in what format order information enters the exchange's systems.
• Through the approval of order forms, which requires any order form other than those the exchange provides to comply with the audit trail.
• Through the approval of proprietary systems, which requires any approved on-floor proprietary system to have the functionality to comply with the audit trail's requirements.

The Cboe order and quote entry rule also fixes the moment an order's time is set: the System timestamps an order or quote upon receipt, and that timestamp determines the time ranking of the order or quote for purposes of processing it.

Exam Tip: Gotchas

• The audit trail is reached indirectly. No Cboe rule defines the audit trail or lists its fields, so a question asking what the rulebook requires is asking about systemization and system approval.
• The system's receipt timestamp sets time ranking. The System stamps an order or quote upon receipt, and that stamp sets its time ranking for processing.

What Does It Mean to Systematize an Order?

Except as the outage procedure provides, each order, cancellation of, or change to an order transmitted to the exchange must be systematized in a format approved by the exchange, either before it is sent to the exchange or upon receipt on the exchange's trading floor.

An order is systematized in either of two ways.

• The order is sent electronically to the exchange.
• The order that is sent to the exchange non-electronically, for example a telephone order, is input electronically into the exchange's systems contemporaneously upon receipt on the exchange, and prior to representation of the order.

The circular places the duty for the second route: it is the responsibility of the Trading Permit Holder receiving a non-electronic order on the floor of the exchange to systematize the order and record any event in the lifecycle of the order, such as a cancellation or a change.

Three more provisions extend systemization past the plain order.

• Hand signals. Hand signal communications on the trading floor may be used to initiate an order, to increase or decrease the size of an order, to change an order's limit price, to cancel an order, or to activate a market order.
  • Any initiation, cancellation or change of an order relayed to a Floor Broker through hand signals must also be systematized under the same paragraph.
  • All other rules applicable to order preparation and retention, and reporting duties, apply, except that the record-keeping obligation lies with the Trading Permit Holder signaling the order.
• Market-Maker orders. Each order a Market-Maker transmits while on the trading floor, including any cancellation of or change to that order, must be systematized under the same procedures, as applicable.
• Execution reports from the floor. A Trading Permit Holder transmitting from the floor a report of the execution of an order must record the time at which that report of execution is received by it.

Exam Tip: Gotchas

• The non-electronic route has two conditions, not one. The order must be input contemporaneously upon receipt and prior to representation, so entering it correctly but after representation is still a miss.
• A hand signal moves the recordkeeping duty. Where a hand signal is used, the record-keeping obligation lies with the Trading Permit Holder signaling the order rather than with the Floor Broker receiving it.

Which Fields Go In Before the Order Is Represented?

For non-electronic market and marketable orders sent to the exchange, the Trading Permit Holder responsible for systematizing the order must input into the exchange's systems at least eight specific items of order information prior to the representation of the order.

Any additional information with respect to the order must be input into the exchange's systems contemporaneously upon receipt, which may occur after the representation and execution of the order.

One further ticket rule governs complex orders.

• Complex orders of 100 legs or less, or 16 legs or less for Electronic Only complex orders, one leg of which may be for an underlying security or security future, as applicable, must be entered on a single order ticket at time of systemization.
• If the exchange permits, larger complex orders may be split across multiple order tickets, provided the Trading Permit Holder representing the complex order uses the fewest order tickets necessary and identifies for the exchange the order tickets that are part of the same complex order, in a form and manner the exchange prescribes.

Exam Tip: Gotchas

• Eight fields is a floor, not a list. The rule says at least the following information, and everything else about the order still has to go in contemporaneously upon receipt.
• Splitting a large complex order is permission, not entitlement. It requires the exchange to permit it, the fewest tickets necessary, and identification of the tickets that belong together.

What Happens During a Systems Outage?

In the event of a malfunction or disruption of the exchange's systems such that a Trading Permit Holder is unable to systematize an order, the Trading Permit Holder or its organization must follow a set procedure during the time the malfunction or disruption lasts.

• Orders received during the outage. Each order transmitted to the exchange must be recorded legibly in a written form that has been approved by the exchange, and the Trading Permit Holder receiving the order must record the time of its receipt on the floor and legibly record the terms of the order, in written form.
• Cancellations and changes during the outage. Each cancellation of, or change to, an order that has been transmitted to the floor must be recorded legibly in an exchange-approved written form, and the Trading Permit Holder receiving it must record the time of its receipt on the floor.
• When the outage ends. Upon the cessation of the malfunction or disruption, the Trading Permit Holder must immediately resume systematizing orders.
• Catching up. In addition, the Trading Permit Holder must exert best efforts to input electronically into the exchange's systems all relevant order information received during the outage as soon as possible, and in any event must input it not later than the close of business on the day the malfunction or disruption ceases.
• A late restart. If the exchange's systems become available for the systemization of orders after the close of business, the Trading Permit Holder would be expected to input that information on the next business day.

Exam Tip: Gotchas

• The outage does not suspend the time record. The receiving Trading Permit Holder still records the time of receipt on the floor, in writing, for orders and for cancellations and changes.
• Resuming and catching up are separate duties. Systemization resumes immediately when the outage ends, and the backlog is input by the close of business that same day, or on the next business day where the exchange's systems become available for the systemization of orders after the close of business.

What Must an Approved Proprietary System Do?

A Trading Permit Holder may either use pre-approved exchange systems or seek exchange approval to use a proprietary or third-party system on the trading floor.

Any proprietary system the exchange approves for use on the trading floor that receives orders is considered an exchange system for the purposes of the field-entry rule above, and any proprietary system the exchange approves shall have the functionality to comply with the audit trail's requirements.

A Trading Permit Holder wanting to use an order form other than those the exchange provides must submit the form to the exchange and obtain approval before using it on the floor. When approving such a form, the exchange must ensure that the form complies with the audit trail.

A proprietary system is deemed to have that functionality, and is therefore approved, if it meets three requirements.

Under the clock requirement, the proprietary system must capture a time synchronized to the NIST atomic clock for four events: the date and time an order is systematized; the date and time an order is executed in full or partially; the date and time the terms of an order are modified; and the date and time an order is cancelled.

Approval is not the end of the exchange's reach. The operation and use of all aspects of the proprietary system by a Trading Permit Holder is subject to inspection and audit by the exchange at any time, and the Trading Permit Holder shall furnish to the exchange such information concerning the proprietary system or its use as the exchange may from time to time request.

Exam Tip: Gotchas

• The proprietary system's clock tolerance is one second, not fifty milliseconds. The fifty millisecond figure belongs to the consolidated audit trail rules for equities and options reporting, and this is the options exchange's own floor system standard.
• Four events need a synchronized time, not just entry. Systemization, execution in full or in part, modification of terms, and cancellation each carry a time stamp.

What Should You Check on Exam Day?

• Confirm the systemization deadline: before the order is sent, or on receipt on the floor, and for a telephone order contemporaneously on receipt and before representation.
• On the floor, put the systemization duty on the Trading Permit Holder receiving the non-electronic order, and the recordkeeping duty on the signaler where a hand signal is used.
• Check that the eight pre-representation fields went in first, and remember the rule says at least those fields.
• During an outage, look for a legible written record with the time of receipt on the floor, and electronic input by close of business the day the outage ends, or the next business day if systems return after that close.
• Give a proprietary system a one second NIST tolerance and four time-stamped events, and remember it stays subject to inspection and audit at any time.