FINRA’s recently-released Regulatory and Examinations Priorities Letter for 2015 reflects substantial regulatory interest in high-frequency trading and other issues arising from trading technology.  Regulatory concern over these issues has been previously reported on this blog here and here.

The 2015 Letter states that FINRA has adapted its surveillance program to identify potentially violative conduct such as trading by “abusive algorithms” made possible by advances in technology and changes in market structure.  Abusive algorithms, according to FINRA, include trading algorithms that seek to manipulate the market through layering, spoofing, wash sales, marking the close, or other manipulative techniques.

The 2015 Letter further states that member firms must be “more vigilant” in detecting and preventing such misconduct through analysis of market participants’ trading activities on their systems.  As such, FINRA will review whether firms’ supervisory and other controls appropriately detect abusive activity by either a firm’s own traders or its customers.

The 2015 Letter also reflects concern over various risks to the market – and risks to trading firms themselves – posed by high-frequency and other algorithmic trading, even where the algorithms may not be considered abusive.  FINRA is particularly concerned about technology controls, including the supervisory process for the development and testing of trading technology.  For example, the 2015 Letter expresses concern as to whether firms perform sufficient off-line testing of changes to trading technology before those changes are deployed.  FINRA examiners will review firms’ technology controls and the segregation of duties of technology staff performing various functions relating to the development, implementation and modification of trading technology.  Examiners will also review risk management and financial and operational controls in light of potential risks from high-frequency trading.

The 2015 Letter also expresses concern with respect to firms’ order routing algorithms, and whether order routing practices provide best execution for customer orders.  FINRA is conducting a sweep of firms that route a significant percentage of unmarketable customer limit orders to trading venues that provide the highest rebates.  The concern is that customers may receive inferior executions because of market movement during the pendency of the order.  FINRA also is in the process of reviewing routing decisions for marketable versus non-marketable orders, and how such decisions are affected by rebates.  In light of these concerns, FINRA examiners will review firms’ practices for evaluating order routing decisions in light of their best execution obligations.  FINRA also noted that it is looking at best execution for options and fixed income transactions.

In addition to these areas of concern, the 2015 Letter also outlines examination priorities with respect to a number of other issues, including sales practices, supervision, cybersecurity, anti-money laundering, market access and other subjects of regulatory interest.

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Photo of Michael R. Hackett Michael R. Hackett

Mike Hackett is a partner in the Litigation Department and Co-Head of the Asset Management Litigation practice. An experienced litigator and trial lawyer, Mike’s practice focuses on complex commercial litigation, with a particular emphasis on asset management, financial services, M&A, shareholder, and life…

Mike Hackett is a partner in the Litigation Department and Co-Head of the Asset Management Litigation practice. An experienced litigator and trial lawyer, Mike’s practice focuses on complex commercial litigation, with a particular emphasis on asset management, financial services, M&A, shareholder, and life sciences disputes.

A significant portion of Mike’s practice concerns disputes and regulation involving private funds, including private equity, venture capital, hedge, real estate and private credit funds, as well as their sponsors, partners, investors, portfolio companies, and officers and directors. Mike’s experience representing private fund clients runs the gamut, from control contests within advisers, to disputes between limited partners and general partners, to representation of investment advisers in connection with regulatory examinations, investigations and enforcement matters. Mike routinely represents funds, fund sponsors, portfolio companies, and their officers and directors, including in significant post-closing M&A disputes.

Mike also litigates high-stakes commercial disputes in the life sciences and financial services areas, including for established pharmaceutical and biotechnology companies, emerging and innovative start-ups, asset managers, and other private capital investors, in areas such as M&A, breach of contract, indemnification, fraud, contested earnouts and royalties, securities and capital markets, and corporate governance.

Mike has been recognized by Chambers USA and was named a “Rising Star” by Massachusetts Super Lawyers.

Photo of Stephen Ratner Stephen Ratner

Stephen L. Ratner has represented banks and other financial services institutions in complex litigations, investigations and enforcement proceedings, arbitrations and mediations, compliance issues, and regulatory controversies involving securities, commodities, and derivative products.

Steve has defended clients in class actions and other actions including…

Stephen L. Ratner has represented banks and other financial services institutions in complex litigations, investigations and enforcement proceedings, arbitrations and mediations, compliance issues, and regulatory controversies involving securities, commodities, and derivative products.

Steve has defended clients in class actions and other actions including high frequency and algorithmic trading, short selling practices, IPO allocations, and data security and privacy issues. He has also handled internal investigations and investigations and enforcement proceedings by the SEC, CFTC, Department of Justice, FINRA and other regulators regarding issues such as high frequency and algorithmic trading, market access, securities lending, trade reporting, short selling, electronic communications, and supervision. Steve also represented banks and other financial institutions in fraudulent transfer litigation and other litigation based upon failed LBOs and alleged Ponzi schemes.

Steve served as a member of Proskauer’s Executive Committee, an adjunct professor of law at Benjamin N. Cardozo School of Law, and a mediator appointed by the U.S. District Court for the Southern District of New York. Steve co-authored the “Broker-Dealer Litigation and Arbitration” chapter in the Commercial Litigation in New York State Courts treatise, and was a frequent speaker on matters related to the financial services industry.