Written by a human
What is TRACE?
The Trade Reporting and Compliance Engine TRACE is a system set up by the financial industry regulatory authority (FINRA) to report eligible fixed income securities, also known as over-the-counter transactions. Brokers are required to report their cryptocurrency, foreign currency, bonds and derivatives transactions, amongst other commodities.
TRACE reporting exists because the over-the-counter market is traditionally very opaque, which makes it harder for customers to complete their due diligence prior to a purchase. This system introduced some much-needed transparency, enabling buyers to reduce their risk and make better-informed financial decisions.
TRACE was introduced in the United States in 2002, and provides real-time data to help brokers understand the market, and their customers to gauge performance. FINRA introduced the engine in order to improve market integrity.
Components of TRACE
- Technical notices: system updates, rule changes and service disruptions
- Technical documentation: user guides and API documents
- FAQs: answers to common queries
- Fees: for registered professionals and academic members
- Data and Licensing: independent research, real-time data and security activity reports
- Report Cards: grading for compliance by regulated firms (monitoring system)
- Legal Agreements: participation contracts
Firms are required to report their trade information through the TRACE system and must therefore prepare compliance plans in order to meet these requirements. However, some larger market participants prefer an alternative reporting method, such as ATS.
Importantly, firms must realize that the rules apply no matter how you report your transactions, and that monitoring all business communications is key to ensure all information is reported.
Industry professionals must report their trades within 15 minutes of the transaction, however in practicality, 80% of all transactions are reported within just five minutes. Data like trade execution time, price, yield and sales volume should all be made available for qualifying fixed income securities. Trade modifiers, like weighted averages or special prices must also be included in the reports.
2025 TRACE updates
In January 2025, multi-factor authentication (MFA) became required by FINRA for members to access API documentation. In order to help clients migrate, they could keep their digital certificates for a short period and were encouraged to test their MFA process in the Nasdaq Test Facility.
However, digital certificates were phased out on the 13th of January, and FINRA required member firms to migrate to MFA by this date.
In May 2025, another new protocol will be introduced by FINRA to the TRACE system in order to further improve transparency. The platform will be migrated over towards a Linux operating system, and clients are required to participate in testing for this.
One key change here is that the Start of day, End of day, End of transmission control and End of trade reporting messages will only be sent once per day, instead of three.
Compliance with TRACE
It is expected that all FINRA member firms will be compliant with the new protocols by the date of introduction. Firm compliance professionals should ensure they know the new trading data rules, and may have to redistribute resources towards testing new systems before they come into effect.
However, continued compliance tasks for the wider TRACE system, and its transaction data requirements is also key, as it provides context to other regulatory issues.
Non-compliance is costly
In 2021, FINRA actually used TRACE data to bring disciplinary action against a trader, Tyler Forbes. Forbes attempted to spoof the market by placing large, non-bona fide proprietary orders to buy or sell, while simultaneously entering smaller, bona fide proprietary orders on the opposite side of the market. It created a false sense of depth in order to ensure the true orders received a favorable execution.
In this case, TRACE eligible securities data was able to provide transparency around the real market depth, and could therefore indicate what Forbes was doing. However, the company that Forbes was working for likely suffered significant reputational damage in relation to this enforcement.
That’s why capturing all communications, across all platforms, is key. Empower your regulatory team to spot suspicious activity through automatic notifications, and ensure everything has been recorded with Global Relay.