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FINRA Sends Market Manipulation Report Cards

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The Financial Industry Regulatory Authority sent to member firms Thursday its first monthly report card aimed at helping firms identify and halt market manipulation tactics such as spoofing and layering.

FINRA also sent the same day to the Securities and Exchange Commission a proposed rule to add another public member to its National Adjudicatory Council, increasing the NAC’s total membership from 14 to 15.

The new report cards, part of an ongoing monthly report on cross-market equities supervision, identify potential spoofing or layering by the firm or entities to which the firm is providing market access.

The reports, which provide a summary of the identified market activity, detailed information about the exceptions, and trends in such trading over the preceding six months, do not reflect conclusions that violations have occurred but indicate potential problems that need to be reviewed, FINRA says.

The report cards are “posted to firms at which [FINRA has] seen exceptional trading activity that may indicate potential spoofing or layering,” a FINRA spokesperson told ThinkAdvisor.

As FINRA explains, 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, while 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.

FINRA CEO Richard Ketchum said in a statement that market manipulation tactics like spoofing and layering “take advantage of other investors and harm public confidence in market integrity. We expect that the firms will use the [report card] data to enhance their own surveillance and move swiftly to cut off potential market manipulation.”

Tom Gira, FINRA’s executive vice president of market regulation, added in the statement that while “most firms attempt to surveil and review for manipulation, … bad actors look to mask their activity by trading across multiple markets or firms, which for any individual firm may be hard to detect.”

FINRA, he added, is “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.”

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.

As to changes to the NAC, FINRA’s appellate tribunal for disciplinary cases, the proposed rule change would expand the size of the NAC to 15 members and apply the requirement that the NAC have more non-industry members, including three public members, than industry members.

Such a change would “follow closely” the requirement that exists in the FINRA bylaws that the number of public governors on the FINRA Board exceed the number of industry governors.


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