FINRA Podcast: 2014 Regulatory and Examination Priorities – Part 5: Market Regulation Priorities

FINRA released the fifth podcast in its five-part series providing an overview of FINRA’s 2014 examination priorities. The focus of the fifth podcast is FINRA’s examination of priorities regarding market regulation. Specifically, it addresses particular areas of market regulation, including:

  • Algorithmic Trading and Trading Systems: FINRA stated that it will continue to assess whether firms’ testing and controls related to high-frequency trading (“HFT”) and other algorithmic trading strategies are adequate in light of the Market Access Rule and firms’ other supervisory obligations. FINRA explained that firms subject to review should be prepared to address whether they conduct separate, independent and robust pre-implementation testing of algorithms and trading systems and whether the firm’s legal, compliance and operations staff are reviewing the design and development of the firm’s algorithms and trading systems for compliance with legal requirements.
  • High-Frequency and Other Algorithmic Trading Abuses: FINRA reminded firms using HFT strategies and other trading algorithms of their obligation to be vigilant when testing these strategies pre- and post-launch to ensure that the strategies do not result in abusive trading. Furthermore, FINRA stated, it continues to be concerned about the use of so-called “momentum ignition strategies,” where a market participant attempts to induce others to trade at artificially high or low prices.
  • Audit Trail Integrity: FINRA stated that it has observed “significant, prolonged and wide-scale” Large Options Positions Reporting (“LOPR”) deficiencies with some firms. FINRA recommended that firms review their systems to make sure that they are filing accurate and complete LOPR reports. Furthermore, FINRA stated, it will focus on in-concert reporting deficiencies, improper position deletions, the non-reporting of positions, and the process that firms use to determine internally whether an over-the-counter position qualifies as a reportable options position.
  • Best Execution of Equities, Options and Fixed Income Securities: FINRA introduced new surveillance patterns to monitor best execution in equities and fixed-income securities. In light of the new patterns, FINRA stated, it will focus more closely on firms’ practices to ensure compliance with their best-execution obligations with respect to limit orders in equity securities. FINRA also noted a new fixed-income surveillance pattern to assess more closely the execution price that a customer receives from a firm relative to other recently executed customer transactions on the same side of the market by the firm.
  • Lofchie Comment: Firms should be particularly aware of FINRA’s focus on best execution in the fixed-income markets; it is nearly a universal rule that any regulatory requirement which begins in the equity markets is imposed eventually on other markets.

    See: FINRA Podcast.