FINRA’s Gira Updates Transparency, Surveillance Initiatives


The Financial Industry Regulatory Authority is right on top of the evolving financial market structure and to that end, has announced new initiatives designed to increase market transparency.

Tom Gira, FINRA

Tom Gira, FINRA

Thomas Gira, Executive Vice President, Market Regulation at FINRA, laid out the regulator’s future plans in remarks made Tuesday, November 15 at the Inaugural Traders Magazine Equity Market Structure Town hall forum at the Upper Story in New York City. In speaking to the audience, he assured that the group is on top of changes in the market and seeks to continue to provide clarity, guidance and transparency into the trading markets.

Gira provided a brief recap of what initiatives have already been put into place, creating a “multi-faceted safety net for the markets and are designed to promote investor confidence.” Among the changes, he told of how regulators adjusted the market-wide circuit breakers, which give market participants an opportunity to assess their positions, valuation models and operational capabilities when extreme periods of volatility occur. On top of that, the marketplace now has a limit up/limit down regime, which addresses the type of sudden individual stock-price movements that the market experienced during the May 2010 flash crash.

Also, he reminded that the Securities and Exchange Commission has also passed the Market Access Rule, which requires firms entering orders into the market, or allowing their customers to enter orders into the market, to have pre-trade controls to avoid erroneous and duplicative orders and to establish pre-trade capital and credit controls on orders entered into the market, among other things. And most recently, the SEC implemented Regulation SCI to strengthen the technology infrastructure of the U.S. securities markets.

“In sum, I think we are rightly focusing on the evolution of the market more than whether there is something seriously wrong with the market,” Gira said. “So in that vein, I would like to focus on how FINRA is working to stay ahead of issues through our focus on transparency and by making use of innovative technology in our surveillance programs.”

Among the new transparency initiatives, FINRA is continuing to look at ways to expand its Trade Reporting and Compliance Engine, or TRACE, which looks at the trading of corporate bonds and their trade data, including the price and size. The system is now looking at expanding TRACE to include transaction and quote data for the $13 trillion Treasury market.

“There is currently no centralized trade reporting system for Treasuries. Regulators, including FINRA, the SEC, the Treasury Department and the Federal Reserve Board, have taken steps to implement a transaction-reporting regime for Treasuries,” he said. “Starting next July, firms will have to report certain transactions in Treasury securities to TRACE.”

At this time, he added FINRA will not disseminate information on transactions in Treasuries. This new requirement will significantly enhance the ability of FINRA and other regulators to understand trading activity in Treasury securities.

On the equity side, Gira said that FINRA will begin to expand its transparency of alternative trading systems, including dark pools. He told attendees that just last month, FINRA began publishing monthly ATS block-size trading statistics in all National Market System stocks.

In terms of market surveillance, Gira said FINRA and the industry have to continue to do more to shift from a reactive approach to a preventive stance.

“We continue to refine existing patterns and develop new surveillance patterns to address new threat scenarios,” he said. “For example, we have recently launched a new cross-market surveillance pattern to detect ramping at the open and close; we have launched a new surveillance pattern that looks for layering in the equity market to create favorable options prices; and we are developing additional cross-market surveillance patterns to more closely monitor trading in ETPs.”

Currently, FINRA’s cross-market surveillance patterns include ETPs, and its cross-market surveillance program has several threat scenarios directly intended to detect potential problematic activity related to the unique attributes of ETPs. In addition, FINRA performs a number of other regular reviews focused on specific aspects of ETP trading.

However, given the prominence of ETP trading, Gira said that FINRA believes that additional cross-market surveillance patterns and threat scenarios are necessary to provide both broader surveillance coverage of all ETPs and to detect potential problematic behaviors unique to specific subcategories of ETPs.

“So we plan to introduce prototypes of a number of these surveillance patterns in the coming months,” Gira said. “Among other things, the patterns will include scenarios designed to detect potential gaming activity among ETPs, their components, related ETPs and options on ETPs; potential manipulation of the ETP creation and redemption process; and a scenario specific to actively-managed ETPs.”

He also said that the to-be-built Consolidated Audit Trail, which was approved bythe SEC on Tuesday, November 15th, will also help keep tabs on the market. FINRA is one of the finalists to build the market data tracking system.

Lastly, Gira said that the regulator is also looking at new ways to track trade layering and spoofing activity by broker-dealers or their customers with new disruptive trading rules and technology.

FINRA’s Board, he said, recently approved rule proposals to expressly identify layering and spoofing as disruptive trading activity and to establish an expedited process for issuing cease-and-desist orders to prevent firms from engaging in the activity or providing access to a customer that engages in the activity. The proposed rule changes are like the rules the Bats and Nasdaq recently adopted, but builds on FINRA’s existing process for temporary cease-and-desist orders.

“In addition to the disruptive trading rule and our cross-market and cross-product surveillance tools, FINRA continues to look for new ways to find and stop manipulative behavior—and uncover manipulative schemes that we don’t yet know about,” he said. “We’re exploring how we can apply data science tools like machine learning in our surveillance development and ongoing parameter adjustment processes.”

To that end, FINRA is looking at machine learning which Gira said can help accelerate the process of surveillance development by having the surveillance analysts identify specific instances of behavior of interest and allow algorithms to “train” themselves to identify additional instances in new data sets. This self-learning process would improve the efficiency of the process to determine appropriate parameters for the surveillance program.

“The technology would also allow us to take the next step and enable the machine-learning algorithms to make modifications to the parameters as market behavior changes,” Gira said. “Machine learning also could provide us with tools to detect manipulative activity that we have not seen before.”

More on Trading:

Related articles

  1. Esma Holds Firm on Double-Sided Reporting

    Clients can have formatted and accurate CAT reports automatically produced over S3 RegTech platform.

  2. Consolidated Audit Trail is now open for reporting by broker-dealers.

  3. Presidential hopeful goes after Wall Street with financial plan.

  4. Value of the initiative will depend on quality of the data.

  5. Latest News

    CAT Specs Steam Ahead

    CAT NMS targets an April 29 release date for its final specification.