Will The SECFINRA Tighten the Belt Around Algorithmic Trading


FINRA wants to increase oversight on Algorithmic traders. A weeks ago, the Financial Industry Regulatory Authority (FINRA) published a regulatory notice titled 15-06.

What the notice was trying to establish was FINRA’s plan to get people associated with the design, development or modifications of algorithmic trading strategies to register with the authority as “Securities Traders.”

Along with the proposal comes seven other similar initiatives to change the structure of the equity markets in the country. A majority of them deal with algorithmic trading strategies, as FINRA wants to expand the supervision and controls of such firms.

The authority defines an algorithmic trading strategy as such: “Any program that generates and routes (or sends for routing) orders (and order related messages, such as cancellations) in securities on an automated basis.”

The regulatory oversight could expand to arbitrage strategies, such as the ones related to index or ETF arbitrage, simultaneous trading in two different securities on the basis of price, and order generation that divides up large orders into smaller ones to reduce the impact of selling or buying on the market.

Regulations may apply to companies that rely on automated trading strategies, including the use of algorithms that make trading more aggressive when volumes are up and those that automatically try to achieve volume-weighted prices.

But FINRA isn’t the only one interested in reigning in the high-frequency traders. Reports suggest that the SEC is also focused on reducing the misconduct by traders who use computer models to put investment strategies into play.

The Securities and Exchange Commission (SEC) has increased its scrutiny of hedge fund managers and quant funds. They have proposed changing some of the regulations concerning high-frequency traders that have achieved a sort of notoriety in the financial sector over the past few years.

However, investors are doing better in the modern day market as compared to the more manual markets, according to Chair of the SEC Mary Jo White. White agrees that the spread and commission have come down over the past decade for institutional as well as retail traders. She also agrees that the trading volumes of high-frequency traders were higher simply because of frequency of trades rather than leverage.

But the SEC is trying to ensure the HFT firms are benefiting investors rather than causing harm and destroying value. The issue of “fairness” is a primary concern when dealing with the HFT firms, according to the SEC.

The recent publication of Martin Lewis’s book Flash Boys has brought the issue to the forefront and the debate surrounding the high-frequency traders has intensified over the past few years. Lewis argues that the market is rigged, a claim refuted by the SEC.

Both the SEC and FINRA are working towards a common goal: controlling the largely disruptive industry of high-frequency traders. The departments are not trying to set the clock back for technology, as some critics says, but rather protect the average investor’s interests.

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