FINRA To Take Closer Look at High-Frequency and Algorithmic Trading, Will Continue to Monitor Private Placements, Complex Products, and Other Areas

This month, the Financial Industry Regulatory Authority announced that it would be placing “significant resources” into monitoring high-frequency and algorithmic trading. The SRO said that following a number of market disruptions last year, it is worried about the way firms oversee these two systems.

In its yearly examination and regulatory priorities letter, FINRA spoke about how despite the fact that many high-frequency trading strategies are legitimate, others can be employed for purposes that are volatile, which is why the SRO wants to keep surveillance of this a priority and make sure that abusive trading doesn’t happen.

FINRA also said that it wants to take a closer look at alternative trading systems due to disclosure and operational concerns and high volume trading. It is examining firms that run ATS, as well as their affiliates. The SRO wants to figure out whether firms are accurately and consistently representing and disclosing different parts of their ATS operations to subscribers. Sweep letters were sent by FINRA to broker-dealers inquiring about ATSs in August.

FINRA also plans to make part of its examinations in 2013 the areas of suitability and complex products, leveraged loan products, exchange- the marketing and sale of private offerings, structured products, business development companies, commercial mortgage-backed securities (MBS).

The SRO has specific concerns about yield chasing conducts, sales practice abuses, and the effect of external stress events, market corrections, or market dislocation on market prices. It intends to use information from the newly Securities and Exchange Commission approved Rule 5123 to improve the way it engages in its risk-based supervision of the private placement market. Under the rule, FINRA members that sell securities of an issuer in a private placement must file a copy of the offering document with the SRO.

Other areas that continue to cause FINRA to worry include high-yield debt instruments, traded notes and funds, exchange-traded funds and notes, municipal securities, structured products, non-traded REITs, closed-end funds, and variable annuities, as well as the issues of data integrity, cyber-security, microcap fraud, anti-money laundering, branch office supervision, automated investment advice, and insider trading.

FINRA to Scrutinize Trading Platforms, Algorithmic and High-Frequency Trading, Bloomberg/BNA, January 16, 2013

Read FINRA’s 2013 regulatory and examination priorities letter (PDF)

More Blog Posts:
FINRA Provides Guidance As It Opens Up Arbitration Process to Investment Advisers, Stockbroker Fraud Blog, November 9, 2012

Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management, Stockbroker Fraud Blog, October 29, 2012

MSRB Seeks Public Comment on New Fiduciary Duty Rule for Municipal Advisors, Institutional Investor Securities Blog, February 21, 2011