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


Best Execution Rule

FINRA Rule 5310 (Best Execution and Interpositioning) governs members’ best execution requirements. The Supplementary Material to Rule 5310 includes provisions concerning securities with limited quotation or pricing information available, orders for foreign securities with no U.S. market, customer instructions on routing orders, and regular and rigorous review of execution quality. FINRA Rule 6438 (Displaying Priced Quotations in Multiple Quotation Mediums) requires members to display the same priced quotation for OTC equity securities in multiple quotation mediums.

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


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


Guidance on Effective Supervision and Control Practices for Firms Engaging in Algorithmic Trading Strategies

Because algorithmic trading strategies, including high frequency trading (HFT) strategies (hereinafter referred to collectively as “algorithmic strategies”), now account for a substantial portion of activity on U.S. securities markets, the potential for these strategies to adversely impact market and firm stability has increased. In light of the increasing use of algorithmic strategies, FINRA published Regulatory Notice 15-09 to provide firms with guidance on effective supervision and control practices for member firms and market participants that use algorithmic strategies. The effective practices discussed in the Notice 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