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 markets.
“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 said.
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 heightened supervision.
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.