{"id":320,"date":"2016-11-23T16:17:37","date_gmt":"2016-11-23T16:17:37","guid":{"rendered":"http:\/\/localhost\/?p=320"},"modified":"2016-11-30T17:10:47","modified_gmt":"2016-11-30T17:10:47","slug":"combating-disruptive-electronic-trading-expedited-cease-and-desist-proceedings-by-finra","status":"publish","type":"post","link":"https:\/\/bdia.pli.edu\/index.php\/2016\/11\/23\/combating-disruptive-electronic-trading-expedited-cease-and-desist-proceedings-by-finra\/","title":{"rendered":"Combating Disruptive Electronic Trading: Expedited Cease and Desist Proceedings by FINRA"},"content":{"rendered":"

The Financial Industry Regulatory Authority, Inc. (\u201cFINRA\u201d) recently filed an immediately effective proposal with the Securities and Exchange Commission (\u201cSEC\u201d) to adopt new rules aimed at certain abusive forms of electronic trading.\u00a0 The proposed rules prohibit two specific types of disruptive quoting and trading activity, and permit FINRA to bring expedited cease and desist proceedings against violations, even if there is no showing of improper intent.\u00a0 The proposal was published by the SEC on November 21, and will become operative on December 15 (see<\/em> SR-FINRA-2016-043, available here<\/a>).<\/p>\n

<\/p>\n

The new rules point up FINRA\u2019s increasing concerns with the continued presence of abuses in the electronic trading markets.\u00a0 FINRA already actively conducts cross-market surveillance for trading abuses, and provides its members with \u201creport cards\u201d aimed at helping firms identify and halt improper activity. \u00a0Now, the new rules effectively permit FINRA to find that certain trading patters are per se<\/em> disruptive.\u00a0 Broker-dealer firms that engage in or permit high-frequency trading strategies will wish to assess their current monitoring and supervisory practices in order to ensure compliance with the new rules.\u00a0 FINRA will expect its members to assess any \u201creport cards\u201d that they have received in connection with their compliance review.<\/p>\n

The new prohibitions will be added as Supplementary Material to FINRA Rule 5210.\u00a0 They forbid FINRA members from engaging in or \u201cfacilitating\u201d the following two types of disruptive quoting and trading activity on electronic markets (commonly known as \u201clayering\u201d and \u201cspoofing\u201d):<\/p>\n

    \n
  1. A frequent pattern in which (a) a party enters multiple limit orders on one side of the market at various price levels (the \u201cDisplayed Orders\u201d), (b) following the entry of the Displayed Orders, the level of supply and demand for the security changes, (c) the party enters one or more orders on the opposite side of the market of the Displayed Orders (the \u201cContra-Side Orders\u201d) that are subsequently executed, and (d) following the execution of the Contra-Side Orders, the party cancels the Displayed Orders.<\/li>\n
  2. A frequent pattern in which (a) a party narrows the spread for a security by placing an order inside the national best bid and national best offer (\u201cNBBO\u201d), and (b) the party then executes an order on the opposite side of the market that executes against another market participant that joined the new inside market established by the order described in clause (a).<\/li>\n<\/ol>\n

    FINRA has made clear that no intent is necessary for a violation.\u00a0 The prohibition also extends to persons acting in concert with others to effect the prohibited activity.\u00a0 The order of events would not control whether or not a violation occurs.\u00a0 The rules would not be limited to activity conducted on a single market venue, but would apply to activity conducted across trading platforms.<\/p>\n

    FINRA recognizes that standard enforcement proceedings can take lengthy periods of time, while cases involving manipulating trading can inflict ongoing, substantial harm.\u00a0 Therefore, the new rules will also permit FINRA to issue a Permanent Cease and Desist Order (\u201cPCDO\u201d) against any FINRA member that (a) violates the new rules, or (b) provides market access to a client engaged in the violative activity.\u00a0 All related proceedings, including hearings, would be conducted on an expedited basis.<\/p>\n

    The new rules are based on similar measures previously adopted by the BATS Exchange.\u00a0 The fact that self-regulatory organizations are adopting expedited procedures to combat specific types of abusive electronic trading practices indicates how seriously regulators are taking these matters.\u00a0 Nonetheless, it is not clear how FINRA intends to determine when a \u201cfrequent pattern\u201d of disruptive trading exists, especially when many high-frequency traders and others frequently place and cancel orders on both sides of the market. \u00a0Broker-dealers that engage in proprietary high frequency trading, and that provide market access to high frequency traders, must be aware of the new rules, assess whether strategies could be deemed disruptive by regulators (including by reviewing any report cards from FINRA), and implement appropriate compliance measures in order to avoid sudden disciplinary actions.<\/p>\n

    Additional contributors to this post:<\/p>\n

    Andrew J. Shipe, andrew.shipe@aporter.com, http:\/\/www.arnoldporter.com\/en\/people\/s\/shipe-andrew-joseph<\/a><\/p>\n

    Daniel Waldman, dan.waldman@aporter.com http:\/\/www.arnoldporter.com\/en\/people\/w\/waldman-daniel<\/a><\/p>\n

    Daniel M. Hawke, daniel.hawke@aporter.com <\/a>http:\/\/www.arnoldporter.com\/en\/people\/h\/hawke-daniel-m<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

    The Financial Industry Regulatory Authority, Inc. (\u201cFINRA\u201d) recently filed an immediately effective proposal with the Securities and Exchange Commission (\u201cSEC\u201d) to adopt new rules aimed at certain abusive forms of electronic trading.\u00a0 The proposed rules prohibit two specific types of disruptive quoting and trading activity, and permit FINRA to bring expedited cease and desist proceedings … Continue reading Combating Disruptive Electronic Trading: Expedited Cease and Desist Proceedings by FINRA<\/span> →<\/span><\/a><\/p>\n","protected":false},"author":11,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[23,24,21],"tags":[],"class_list":["post-320","post","type-post","status-publish","format-standard","hentry","category-compliance","category-enforcement","category-regulatory"],"aioseo_notices":[],"post_mailing_queue_ids":[],"_links":{"self":[{"href":"https:\/\/bdia.pli.edu\/index.php\/wp-json\/wp\/v2\/posts\/320","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bdia.pli.edu\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bdia.pli.edu\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bdia.pli.edu\/index.php\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/bdia.pli.edu\/index.php\/wp-json\/wp\/v2\/comments?post=320"}],"version-history":[{"count":0,"href":"https:\/\/bdia.pli.edu\/index.php\/wp-json\/wp\/v2\/posts\/320\/revisions"}],"wp:attachment":[{"href":"https:\/\/bdia.pli.edu\/index.php\/wp-json\/wp\/v2\/media?parent=320"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bdia.pli.edu\/index.php\/wp-json\/wp\/v2\/categories?post=320"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bdia.pli.edu\/index.php\/wp-json\/wp\/v2\/tags?post=320"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}