Going into 2017, we see that FINRA has many initiatives relating to equity market structure and automated trading activities surrounding algorithmic trading including new registration requirements , Market Access Controls and abusive algorithms surrounding the trading of U.S. Treasury securities.
Beginning January 30, 2017, as noted in FINRA Regulatory Notice 2016-21, each associated person who is primarily responsible for the design, development or significant modification of an algorithmic trading strategy relating to equity, preferred or convertible debt securities, or who is responsible for the day-to-day supervision or direction of such activities, must pass the Series 57 exam and register as a Securities Trader.
In summary, NASD Rule 1032(f) was amended to expand the scope of persons required to register as a Securities Trader. Specifically, the rule amendment requires each person associated with a member to register as a Securities Trader if such person is:
- Primarily responsible for the design, development or significant modification of an algorithmic trading strategy relating to equity, preferred or convertible debt securities; or
- 2. Responsible for the day-to-day supervision or direction of such activities. This amendment is part of FINRA’s initiatives relating to equity market structure and automated trading activities, including high frequency trading.
The notice provides examples of “Algorithmic Trading Strategies”, advice as to who is required to register, and registration requirements for firms that utilize Third-party Algorithms.
FINRA’s 2017 Regulatory and Examination Priorities Letter, discussed activities associated with Algorithmic Trading Strategies with respect to the Market Access Rule (Rule 15c3-5) and the Fixed Income Securities Surveillance Program. With respect to the Market Access Rule, in addition to improving compliance with the rule (e.g., documenting controls, documenting rationales for setting controls, and identifying the individuals responsible for monitoring those controls and consistently monitor the effectiveness of the controls they employ), some best practices that FINRA recommends is for firms should consider incorporating into their market access controls include:
- implementing, memorializing and monitoring pre-trade and post-trade controls;
- implementing procedures for the supervision,
- development, testing and employment of algorithmic trading, including code development or changes; and
- maintaining reasonable processes to monitor whether trading algorithms operate as intended, and processes to disable algorithms or systems that malfunction.
In addition, FINRA noted in the 2017 Priorities Letter that the Fixed Income Securities Surveillance Program will also develop customer protection surveillance patterns focusing on compliance with rules applicable to U.S. Treasury securities, as well as patterns looking for abusive algorithms.
For compliance solutions covering this update, please contact Elin Cherry at Elinphant, LLC at (212) 739-9255.
Elinphant provides services to all Financial Institutions. We address needs on a continuous or project basis. Elinphant has experience in transitions of Compliance Officers. Our ability to implement or enhance compliance programs ranges from highly regulated to unregulated financial and financial technology firms. Our Compliance Officers take pride in the depth of their compliance knowledge. Elinphant’s team of Compliance Officers have experience that allows them to mold services to each client’s business. We understand that not all clients have the same risk tolerance. We adjust advice and implementation to match risk tolerance. Elinphant ensures clients are within their risk tolerance and rules and regulations.
Elin is the CEO of Elinphant a financial compliance services firm. Elin ensures compliance officers who serve clients are skilled and knowledgeable in relation to the clients business and needs. Elin is known for looking at compliance challenges as well as marketing and sales in an innovative and direct manner.