The Financial Industry Regulatory Authority (FINRA) will
investigate market participants’ algorithmic trading systems to ensure adequate
monitoring is taking place and help the industry avoid algo-related trading
errors, the organisation has stated.
In a statement outlining the US regulator's priorities for 2014 released last week, FINRA said it would assess –
through examinations and targeted investigations – whether firms had adequate
controls for testing and implementation of algorithmic trading strategies,
including high-frequency trading (HFT).
In particular, it would look to ensure firms’ met the
requirements of the 2010 market access rule, which requires broker-dealers to
have satisfactory risk checks in place before providing clients with access to
“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,” the
FINRA statement read.
To achieve this, FINRA will boost its use of data and
analytics. In an adjoining letter, Richard Ketchum, chairman and CEO of FINRA,
said use of advanced data was key to ensuring market participants were properly
following relevant trading rules.
“In our market regulation program, we are using advanced
technology to aggregate data across multiple trading venues in order to see
trading patterns we weren't able to see before. We have expanded our
cross-market equity surveillance patterns—as well as introduced a number of new
threat scenarios to those patterns—to focus more specifically on certain types
of manipulative trading activity uncovered in our investigations,” Ketchum
The self-regulatory body also stated it will pay greater attention to
sell-side firms that employ brokers that have previously fallen foul of the
rules. This includes the expansion of a FINRA program that identifies high-risk
brokers, including examining whether firms’ place such individuals under
FINRA will use analytics within its broker migration model
to monitor brokers that have moved from a firm that has a serious disciplinary
history. The model uses scoring to prioritise the surveillance at a firm-based
level, which will help FINRA conduct accelerated examinations.