Monday, July 22, 2013

FINRA Focuses Investigation of High-Frequency Trading Firms

By Tim Dulaney, PhD and Tim Husson, PhD

In January, FINRA released their annual regulatory and examinations priorities (PDF) for the upcoming year, in which they vowed to "focus significant resources" on, among other things, algorithmic trading and high-frequency trading (HFT) abuses.  They have already levied a record fine against a brokerage firm for failing to supervise manipulative high-frequency trading, and their emphasis on HFT issues mirrors efforts by the SEC and CFTC to bring the HFT industry under better regulatory control.

Late last week, FINRA posted a Targeted Examination Letter highlighting many of the issues raised in the priorities document. According to Law360, the letter has been sent to about 10 firms.  The letter requests details concerning HFT firms' software development including specific details about the supervision and oversight of modifications and testing under non-normal/extreme market conditions.  FINRA also wants HFT firms to provide information on their controls to minimize market impact (such as manual or automatic "kill switches").

The SEC announced a proposed rule -- Regulation Systems Compliance and Integrity ("Reg SCI") -- earlier this year to "better insulate the markets from vulnerabilities posed by systems technology issues."  The period for comments on was extended through July and has recently closed.  We hope that the end result of Reg SCI and FINRA's examination will be more stable financial markets that are less prone to trading abuses.

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