New Equities Supervision Reports Are Designed to Help Firms Spot and Halt Potential Manipulation
April 29, 2016 — WASHINGTON–(BUSINESS WIRE)–The Financial Industry Regulatory Authority (FINRA) today made available to member firms its first monthly cross-market equities supervision report cards, aimed at helping firms identify and halt spoofing and layering activity.
“FINRA is marshaling its ability to look across trading at different firms and markets to bring that information to bear in the fight against layering and spoofing,” said Chairman and CEO Richard Ketchum. “These types of manipulation take advantage of other investors and harm public confidence in market integrity. We expect that the firms will use the data to enhance their own surveillance and move swiftly to cut off potential market manipulation.”
Layering refers to entering limit orders with the intended effect of moving the market to obtain a beneficial execution on the other side of the market. Spoofing refers to entering orders to entice other participants to join on the same side of the market at a price at which they would not ordinarily trade, and then trading against the other market participants’ orders.
The new report cards are sent to firms where FINRA identifies potential spoofing or layering by the firm or entities to which the firm is providing market access. The reports provide a summary of the identified market activity, detailed information about the exceptions, and trends in such trading over the preceding six months. The report cards do not reflect conclusions that violations have occurred; rather they indicate potential problems that need to be reviewed.
“Most firms attempt to surveil and review for manipulation, but bad actors look to mask their activity by trading across multiple markets or firms, which for any individual firm may be hard to detect,” said Tom Gira, Executive VP of Market Regulation. “We are leveraging our cross-market data and employing sophisticated automated surveillance technology to flag suspicious trading patterns so that firms can add that data to their own surveillance and supervisory processes and take appropriate action to address the activity even before FINRA can complete a formal investigation.”
Gira explained that the reports to the firms are a preventive compliance measure that will operate in parallel with FINRA’s own surveillance process, and that FINRA will continue its current practice of investigating suspected manipulation and, where appropriate, taking enforcement action or referring the activity to the Securities and Exchange Commission if the market participants in question are outside of FINRA’s jurisdiction.
The report cards are the first in a planned series focusing on cross-market manipulation. The cross-market reports join an existing array of report cards to firms covering such areas as trade reporting, best execution, audit trail reporting and Regulation NMS compliance.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services.
FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities.
FINRA also administers the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.