HFT To Come Under Finra Oversight

Terry Flanagan

The U.S. Securities and Exchange commission has taken the position that firms engaged in high frequency trading across trading venues should be subject to Finra regulation, including broker-dealer examinations, broker-dealer disclosures and rules governing broker-dealer conduct.

Under an existing rule, high-frequency traders that engage in off-exchange trading for their own accounts typically are exempt from Finra registration. The SEC last week proposed amending this rule to limit the exemption to broker-dealers who execute off-exchange transactions solely for the purpose of hedging the risks of floor-based trading activity, or based on orders routed by a national securities exchange.

“The SEC’s desire to make high frequency traders register with Finra, an industry-funded regulator of brokers that is overseen by the SEC, is getting nearer to becoming a reality,” Walter Ferstand, regulatory compliance expert at NICE Actimize, told Markets Media. “The SEC proposal still needs another vote, but this measure is an important one that could ultimately boost regulators’ ability to monitor markets for potential fraud and abuse.”

The measure would significantly strengthen regulatory oversight over active proprietary trading firms and the strategies they regularly use. “This is a great step forward and a big plus for Finra to increase their regulatory oversight within the industry,” said Ferstand.

SEC Chairman Mary Jo White, who signaled the move in a June 2014 speech on market structure, “continues to demonstrate that she is a ‘bull’ in the regulatory arena and wants to carry out an aggressive bold strategy,” Ferstand said.

This latest push from the SEC is part of the new regulatory landscape that has been created since the 2008 financial crisis. The Dodd-Frank whistleblowing rule, for example, has resulted in heightened supervision both internally at the firm level, as well as externally by regulators. “All these efforts together should encourage a better regulated, transparent marketplace,” Ferstand said.

The SEC action would affect more than 125 unregulated firms, many of them high-frequency traders – making up a large degree of market activity, according to Ferstand.

“While it would be nearly impossible to put a deadline on when all this could be finalized, the wheels are turning for further oversight on high frequency trading firms,” he said. “We can’t help but agree that this move is important, and would improve the integrity of the market place. While this has been a debated topic for a number of years, the SEC vote and push demonstrated the need to have an SRO like Finra maintain oversight.”

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