As algorithmic trading strategies, including high frequency trading (HFT) strategies, have grown more widespread in U.S. securities markets, the potential for these strategies to adversely impact market and firm stability has likewise grown.
FINRA member firms that engage in algorithmic strategies are subject to SEC and FINRA rules governing their trading activities, including FINRA Rule 3110 (Supervision).
A reasonable supervision and control program may not prevent every possible failure. However, there are several effective supervision and control practices that firms can employ to reduce the likelihood and mitigate the impact of future problems. These practices including the following:
- General Risk Assessment and Response – Firm should undertake a holistic review of their trading activity and consider implementing a cross-disciplinary committee to assess and react to the evolving risks associated with algorithmic strategies.
- Software/Code Development and Implementation – Firms should also focus efforts on the development of algorithmic strategies and on how those strategies are tested and implemented.
- Software Testing and System Validation – Testing of algorithmic strategies prior to being put into production is an essential component of effective policies and procedures.
- Trading Systems – Firms should develop their policies and procedures to include review of trading activity after an algorithmic strategy is in place or has been changed.
- Compliance – Ensuring that there is effective communication between compliance staff and the staff responsible for algorithmic strategy development is a key element of effective policies and procedures.
CONTACT OGC
FINRA's Office of General Counsel (OGC) staff provides broker-dealers, attorneys, registered representatives, investors and other interested parties with interpretative guidance relating to FINRA’s rules. Please see Interpreting the Rules for more information.
OGC staff contacts:
Alex Ellenberg and Racquel Russell
FINRA, OGC
1700 K Street NW
Washington, DC 20006
(202) 728-8000
FINRA Rules
FINRA Rules
FINRA Rules
FINRA Rules
SEC Approves Rule to Require Registration of Associated Persons Involved in the Design, Development or Significant Modification of Algorithmic Trading Strategies
06/06/2016
Guidance on Effective Supervision and Control Practices for Firms Engaging in Algorithmic Trading Strategies
03/26/2015
FINRA Requests Comment on a Proposal to Require Registration of Associated Persons Involved in the Design, Development or Significant Modification of Algorithmic Trading Strategies
03/19/2015
Rules Requiring the Identification of Non-Member Broker-Dealers in Order Audit Trail System (OATS) Reports and the Reporting of Additional Order Information by Alternative Trading Systems (ATS)
11/14/2014
FINRA Requests Comment on a Proposal to Publish OTC Equity Volume Executed Outside Alternative Trading Systems
11/12/2014
FINRA Requests Comment on a Proposal to Identify OTC Equity Trades Reported More Than Two Seconds After Execution as "Out of Sequence" and Not Last Sale Eligible
11/12/2014
FINRA Requests Comment on a Proposal to Tighten Business Clock Synchronization Requirements
11/12/2014
SEC Approves FINRA Rule Concerning Self-Trades
06/30/2014
Guidance
The Manipulative Trading topic of the 2024 FINRA Annual Regulatory Oversight Report (the Report) informs member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations, including (1) regulatory obligations and related considerations, (2) findings and effective practices, and (3) additional resources.
January 09, 2024
Targeted Examination Letter
The Trading Examinations Unit (“TEU”) within the Trading and Market Making Surveillance (“TMMS”) group of the Market Regulation Department at FINRA is conducting a review of the Firm’s controls and processes in connection with the development and use of trading algorithms , as well as controls surrounding automated trading technology.
July 01, 2013
August 18, 2014
September 25, 2012
September 13, 2010
Investor Insights
The debate isn’t always easy to understand if you don't have a handle on high-frequency trading terminology. Here are some common terms to get you started.
