FINRA’s Guidance for Securities Traders Using Algorithmic Trading Strategies: A Perspective in 2016
Today, Algorithmic Trading Strategies account for a substantial portion of market analysis on US securities markets. The potential for such methods to affect the market are substantial. As a result, in March 2015, the Securities and Exchange Commission (SEC) proposed an amendment to Rule 15b9-1 under the Securities Exchange Act of 1934 requiring active proprietary securities trading firms to become members of the Financial Industry Regulatory Authority (FINRA). The current rule has allowed many firms that operate a proprietary trading business to avoid FINRA regulation.
FINRA also proposed enhancing regulatory oversight of members involved in high frequency trading. It would require all members involved in the design, development, or modification of algorithmic trading strategies to register as Securities Traders and be regulated. The guidance covers risk assessment and response, trading systems, regulatory compliance, and software and code development and implementation, testing, and validation.
This LIVE Knowledge Group CLE course offers securities market participants an overview of the latest trends, critical updates, and important changes in FINRA’s Guidance for Securities Traders Using Algorithmic Trading Strategies. The panel of distinguished professionals will discuss the implications of the latest regulatory notice guidance and offer best practices to ensure compliance with FINRA rules.
Key topics include:
- Algorithmic Trading – Potential Effect on Securities Markets
- FINRA’s Algorithmic Strategies Rule
- Risk Assessment and Response
- Software & Code Development and Implementation
- Software Testing and System Validation
- Trading Systems
- Rule 5210 on Publication of Transactions and Quotations
- Rule 2010 on Standards of Commercial Honor and Principles of Trade
- Rule 6140 (Other Trading Practices)
- FINRA Rules – Implications to Securities Trading Firms
- Compliance and Litigation Risks
- Best Practices for Securities Traders
Jeffrey Plotkin, Partner
Finn Dixon & Herling LLP
Topic - Regulatory Initiatives Regarding Algorithmic Trading
- June 2014 - SEC Chairman Mary Joe White announced that the SEC staff was preparing two rulemaking proposals addressing algorithmic trading: “the first, a rule to clarify the status of unregistered active proprietary traders to subject them to our rules as dealers; and second, a rule eliminating an exception from FINRA membership requirements for dealers that trade in off-exchange venues.”
- The SEC has not yet issued a proposal regarding “unregistered active proprietary traders” -- a category of traders which conceivably could include institutional traders (such as hedge funds) which account for a sizable percentage of algorithmic trading activity. The industry is anxiously awaiting this proposal.
- March 2015 - the SEC proposed rule amendments that would require broker-dealers which currently are excepted from FINRA membership to become FINRA members if they engage in “significant” proprietary trading in the off-exchange markets. These broker-dealers account for approximately 50% of all orders sent directly to alternative trading systems such as dark pools.
- September 2014 - in reaction to Chairman White’s announcement, FINRA’s Board authorized FINRA to issue a proposal establishing a registration requirement for associated persons who are (1) primarily responsible for the design, development or for directing the significant modification of an algorithmic strategy; or (2) responsible for supervising such functions. March 2015 - FINRA issued the registration proposal.
- FINRA’s Board also authorized FINRA to publish a Regulatory Notice reminding firms of their existing supervisory obligations regarding the development and employment of algorithmic trading strategies. March 2015 - FINRA issued the Guidance that forms the main subject matter of this webinar.
- The pending SEC and FINRA regulatory initiatives could materially alter the regulatory landscape for algorithmic traders.
Ross Pazzol, Partner
Katten Muchin Rosenman
Topic – FINRA’s Guidance Regarding Supervision and Control Practices for Algorithmic Trading Strategies
- Based upon its review of systems related issues at member firms, FINRA has been focusing on whether and to what extent member firms have appropriate supervisory controls and procedures related to the creation, modification, usage and testing of trading algorithms.
- In Regulatory Notice 15-09, FINRA published formal guidance on effective supervision and controls practices for firms engaging in algorithmic trading strategies.
- FINRA’s guidance focuses on the following broad areas:
- Software / Code Development and Implementation.
- Software Testing and System Validation.
- Trading Systems and Implementation.
- Compliance Monitoring.
- FINRA guidance does not purport to impose new substantive requirements on member firms. However, FINRA expects members firms to reevaluate their current practices in light of this guidance.
- Key to FINRA guidance is that firms that use algorithmic trading strategies must supervise every phase of the software development process, rather than just focusing on the end results.
- FINRA guidance raises question of whether FINRA may sanction firms for having deficient software development processes, even if such deficiencies do not cause more specific rule violations.
Harry Frischer, Partner
Proskauer Rose LLP
Topic - Recent Enforcement Actions/Examination Priorities Regarding Algorithmic Trading
- The SEC’s September 30, 2015 settlement with high frequency trading firm Latour Trading LLC illustrates many of the issues that FINRA is concerned about, the litigation and regulatory risks to firms and how those risks might be reduced.
- Latour’s violations of Reg. NMS over a multi-year period arose from computer coding errors, errors of logic, failure to conduct proper surveillance, and failure to have sufficient controls regarding modifications to trading system code.
- In a number of prior cases, as in Latour, coding errors in algorithmic trading systems led to violations of securities regulations and sanctions. An examination of the particular errors made in these cases, and the reasons the errors remained undetected, may assist firms in avoiding similar errors in the future.
- In other enforcement matters, the SEC found high-frequency trading algorithms to be abusive because they manipulated the markets through layering, spoofing, wash sales, marking the close or other means. These cases show how regulators identify abusive algorithms, and the bases for a finding of market manipulation in the context of algorithmic trading.
- FINRA’s 2015 Examination Priorities Letter describes generally what examiners expect to review in connection with controls over trading technology and abusive algorithms. The lessons learned from the enforcement cases discussed above may help firms to improve their controls in these critical areas, their preparation for future examinations and their overall compliance with FINRA guidance on algorithmic trading.
Who Should Attend:
- Securities Traders
- Securities Attorneys
- Algorithm and Software Developers
- Algorithmic Trading Analysts
- Capital Market Analysts
- Compliance and Risk Managers
- Finance Officers
- Financial Analysts
- Financial Attorneys
- General Counsel
- IT Chiefs
- High-frequency Traders
- Other Related & Interested Professionals
Jeffrey Plotkin is a partner of Finn Dixon & Herling LLP in Stamford, Connecticut. He started his career in the SEC's Division of Enforcement, New York Regional Office, where he served as Staff Attorney; Chief of the Branch of Broker-Dealer Enforcement; and Assistant Regional Administrator. While at the SEC, Mr. Plotkin investigated the role that algorithmic trading programs and program trading may have played in the “Black Monday” October 19, 1987 stock market crash.
Mr. Plotkin has been in private practice for the past 25 years, focusing on securities enforcement, securities compliance, internal corporate investigations, complex private securities litigation and arbitration, and white collar criminal defense. He regularly represents broker-dealers in SEC, FINRA, stock exchange, and options exchange investigations concerning algorithmic trading, including High Frequency Trading, with a focus on quote stuffing, spoofing, layering, wash trades, excessive cancelations, matched trades, marking the close, SEC Market Access Rule compliance, and electronic market maker quoting and pricing obligations.
Mr. Plotkin served two consecutive years as the Independent Third Party Auditor for a NYSE specialist firm pursuant to former NYSE Rule 104(h), by conducting reviews of all specialist algorithms and systems to ensure they operated in accordance with SEC and NYSE rules.
Mr. Plotkin has been an adjunct professor for New York Law School’s LLM Program in Financial Services Law, and a guest lecturer at the Columbia University Graduate School of Business. He has been Co-Chair of the Securities Subcommittee of the White Collar Criminal Litigation Committee, Commercial and Federal Litigation Section, New York State Bar Association. Mr. Plotkin is the author or co-author of numerous articles concerning securities law, and the author of numerous White Papers published on behalf of technology vendors concerning securities compliance.
Jeffrey Plotkin is a partner of Finn Dixon & Herling LLP in Stamford, Connecticut. He started his career in the …
Ross Pazzol's practice encompasses a broad range of financial services matters. He focuses primarily on the regulation of broker-dealers, futures commission merchants, investment companies and hedge funds, clearinghouses and investment advisers.
Ross has significant experience in all aspects of exchange-traded and over-the-counter derivatives transactions as well as securities financing and lending arrangements, and assists clients in understanding the documentation issues and regulatory and credit considerations that arise in connection with these transactions. He also represents hedge funds, commodity pools and proprietary trading firms in a wide variety of corporate and regulatory matters, and advises financial services firms on mergers and acquisitions, private securities offerings and general employment matters.
Ross began his career in the US Securities and Exchange Commission's Division of Market Regulation.
Ross Pazzol's practice encompasses a broad range of financial services matters. He focuses primarily on the regulation of broker-dealers, futures …
Harry Frischer is a partner in Proskauer’s Litigation Department. He has more than 35 years of experience in a wide variety of complex litigations, arbitrations, regulatory investigations and enforcement proceedings and related matters. A substantial portion of Harry’s practice involves the financial services industry, where he has represented financial institutions, broker-dealers, hedge funds, private investment funds, investment managers, traders, service providers and others. Harry has tried cases in the federal and state courts, conducted arbitrations before FINRA, the American Arbitration Association, and other arbitration forums. He has argued appeals in the United States Circuit Court of Appeals and state appellate courts. He regularly represents executives who are targets and witnesses in regulatory investigations and enforcements proceedings conducted by the SEC, FINRA, CFTC, DOL, and other federal and state regulators. Additionally, Harry has extensive experience involving complex securities, structured securities, derivatives, swaps, and similar instruments. He has also represented financial institutions in litigation and regulatory matters involving algorithmic and high frequency trading, as well as other matters involving the trading of financial instruments in a variety of contexts.
Harry Frischer is a partner in Proskauer’s Litigation Department. He has more than 35 years of experience in a wide …
Print and review course materials
Method of Presentation:
On-demand Webcast (CLE)
NASBA Field of Study:
NY Category of CLE Credit:
Areas of Professional Practice
Unlock All The Knowledge and Credit You Need
Leading Provider of Online Continuing Education
It's As Easy as 1, 2, 3
Get Your 1-Year All Access Pass For Only $199
About Finn Dixon & Herling LLP
Finn Dixon & Herling LLP is a corporate law firm in Stamford, Connecticut with approximately fifty attorneys. The firm focuses on private equity and M&A transactions, investment adviser and broker-dealer regulation, government and internal investigations, and complex commercial litigation. For eleven consecutive years, the firm has been ranked in Chambers and Partners' top tier for Corporate/M&A law firms in Connecticut. Finn Dixon & Herling LLP is the only law firm currently designated by Chambers to its top tier, “Band 1”, for Corporate/M&A law firms in Connecticut.
About Katten Muchin Rosenman
Katten’s founding attorneys sought to create an entrepreneurial law firm, providing not just excellent legal services but also a deep understanding of business and industry paired with superb client service.
About Proskauer Rose LLP
Proskauer is a leading international law firm focused on creating value. Our roots go back to 1875, when we were founded in New York City. With 700+ lawyers active in virtually every major market worldwide, we are recognized not only for our legal excellence, but also our dedication to client service. Our clients include many of the world’s top companies, financial institutions, investment funds, not-for-profit institutions, governmental entities and other organizations across industries and borders. We also represent individuals in transactions and other matters. In addition to New York, we have offices in Beijing, Boston, Chicago, Hong Kong, London, Los Angeles, Paris, São Paulo and Washington, D.C., as well as Boca Raton, Newark and New Orleans.