TRADING

General

Approval of Rule Change To Amend FINRA Rules To Conform to Amendments to SEC Rule 15c6–1(a) and the Industry-Led Initiative To Shorten the Standard Settlement Cycle for Most BrokerDealer Transactions From T+3 to T+2

On December 14, 2016, FINRA’ filed with the SEC, pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) and Rule 19b–4 thereunder, a proposed rule change to conform its rules to an amendment proposed by the Commission to Rule 15c6–1(a) under the Act to shorten the standard settlement cycle for most broker-dealer transactions from three business days after the trade date (‘‘T+3’’) to two business days after the trade date (‘‘T+2’’). The proposed rule change was published for comment in the Federal Register on December 28, 2016.

The ISC has identified September 5, 2017, as the target date for the transition to a T+2 settlement cycle to occur.

Securities Exchange Act Release No. 34–80004 (February 9, 2017), (File No. SR–FINRA– 2016–047):  Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Granting Approval of a Proposed Rule Change To Amend FINRA Rules To Conform to the Commission’s Proposed Amendment to Commission Rule 15c6–1(a) and the Industry-Led Initiative To Shorten the Standard Settlement Cycle for Most BrokerDealer Transactions From T+3 to T+2

 

Stop Orders

FINRA encourages firms to review their practices regarding stop (or stoploss) orders, with an emphasis on educating investors regarding the risks and benefits of stop orders and special considerations around the use of stop orders during volatile market conditions. To accomplish this, firms should consider, among other things, providing targeted training to registered representatives regarding the risks associated with stop orders and, where appropriate, making alternative recommendations to meet customer objectives. Firms that allow customers to enter stop orders directly online should ensure that they prominently provide clear and comprehensive disclosures to customers at the time of order entry. Firms should also consider implementing systemic safeguards around the use of stop orders.

FINRA Regulatory Notice 16-19 (May 2016):  FINRA Issues Guidance Regarding the Use of Stop
Orders During Volatile Market Conditions

 

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 is issuing Regulatory Notice 15-46 to reiterate the best execution obligations that apply when firms receive, handle, route or execute customer orders in equities, options and fixed income securities. FINRA is also issuing this Notice to remind firms of their obligations, as previously articulated by the Securities and Exchange Commission (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

 

SEC Issued an Order Approving the National Market System (NMS) Plan to Implement a Tick Size Pilot Program by the National Securities Exchanges and FINRA

On May 6, 2015, the SEC issued an order approving the NMS Plan to implement a Tick Size Pilot Program by the National Securities Exchanges and FINRA. The order approved the NMS Plan for a two-year period and will officially commence on October 3, 2016. The Tick Size Pilot is a data-driven test to evaluate whether or not widening the tick size for securities of smaller capitalization companies would impact trading, liquidity and market quality of those securities. The pilot will consist of a control group and three test groups, with each test group having approximately 400 securities.

• Visit FINRA Tick Size Pilot Program for more information

  

Limit Up/Limit Down Plan Program

On May 31, 2012, the SEC approved the NMS Plan to Address Extraordinary Market Volatility (Plan), which was filed by FINRA and the other self-regulatory organizations and is designed to address the type of sudden price movements that the market experienced on the afternoon of May 6, 2010. The Plan provides for a market-wide limit up and limit down (LULD) mechanism to prevent trades in NMS stocks from occurring outside of specified price bands, coupled with trading pauses to accommodate more fundamental price moves. The Plan is designed, among other things, to protect investors and promote fair and orderly markets. 

• FINRA Alert on Limit Up/Limit Down (LULD) Plan

FINRA Regulatory Notice 16-26 (July 2016):  FINRA Adopts Amendments Relating to the Regulation NMS Plans to Address Extraordinary Market Volitality

• FINRA Regulatory Notice 13-12 (March 2013):  FINRA Adopts Amendments Relating to Regulation NMS Plan to Address Extraordinary Market Volatility

• FINRA has published two charts to assist members in identifying the types of transactions that are excluded from the price bands under the LULD Plan and FAQs to provide guidance on LULD

Supervision

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

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