EQUITY

Algorithmic Trading

Qualification and Registration of Associated Persons Relating to Algorithmic Trading

The SEC approved an amendment to NASD Rule 1032(f) that expands the scope of persons required to register as a Securities Trader. Specifically, beginning January 30, 2017, 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.

• FINRA Regulatory Notice 16-21 (June 2016):  SEC Approves Rule to Require Registration of Associated Persons Involved in the Design, Development or Significant Modification of Algorithmic Trading Strategies

 

FINRA Topic Page:  Algorithmic Trading

FINRA Topic Page:  Algorithmic Trading

Execution

Best Execution Rule

In light of the increasingly automated market for equity securities and standardized options, and recent advances in trading technology and communications in the fixed income markets, FINRA reiterates the best execution obligations that apply when firms receive, handle, route or execute customer orders in equities, options and fixed income securities. FINRA reminds firms of their obligations, as previously articulated by the SEC and FINRA, to regularly and rigorously examine execution quality likely to be obtained from the different markets trading a security.

FINRA Regulatory Notice 15-46 (November 2015):  Guidance on Best Execution Obligations in Equity, Options and Fixed Income Markets

General

Equity Research

The SEC approved the adoption of FINRA Rule 2241 (Research Analysts and Research Reports), a consolidated rule to address conflicts of interest relating to the publication and distribution of equity research reports. Provisions of Rule 2241 became effective December 24, 2015.

• FINRA Regulatory Notice 15-30 (August 2015):  SEC Approves Consolidated Rule to Address Conflicts of Interest Relating to the Publication and Distribution of Equity Research Reports

Supervision

Equity Trading Initiatives:  Supervision and Control Practices for Algorithmic Trading Stragegies

As algorithmic trading strategies, including high frequency trading (HFT) strategies (hereinafter referred to collectively as “algorithmic strategies”), have grown to compose a substantial portion of activity on U.S. securities markets, the potential for these strategies to adversely impact market and firm stability has likewise grown. Although a reasonable supervision and control program may not foresee every potential failure or prevent every undesirable consequence, in an effort to reduce the future occurrence of such potential issues, FINRA is providing guidance on effective supervision and control practices for member firms and market participants that use algorithmic strategies. These effective practices are focused on five general areas: General Risk Assessment and Response; Software/Code Development and Implementation; Software Testing and System Validation; Trading Systems; and Compliance.

FINRA Regulatory Notice 15-09 (March 2015):  Guidance on Effective Supervision and Control Practices for Firms Engaging in Algorithmic Trading Strategies