The Financial Industry Regulatory Authority (FINRA) today provided certain of its member firms with the agency’s first monthly cross-market equities supervision report cards, aimed at helping them to identify and put a stop to spoofing and layering activity, according to an official press release.
Layering is a term used to refer to entering limit orders with the intended effect of moving the market to obtain a beneficial execution on the other side of the market. Spoofing, meanwhile, 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.
These activities, among other questionable practices, have been areas of concern from industry people and regulators with regard to speed traders and high-frequency traders that employ latency-based strategies while trading in US capital markets, in addition to the market manipulation that spoofing and layering can sometimes achieve.
Cross-market equities supervision report cards help firms put a stop to spoofing and layering activity.
Chairman and CEO of FINRA, Richard Ketchum, commented in the press release: “These types of manipulation take advantage of other investors and harm public confidence in market integrity. We expect that the firms will use the data to enhance their own surveillance and move swiftly to cut off potential market manipulation.”
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The new report cards will be sent to firms where FINRA identifies potential spoofing or layering by the firm or entities to which the firm is providing market access. The reports provide a summary of the identified market activity, information about the exceptions and recent trends in such trading, focusing on potential problems that need to be reviewed.
FINRA will leverage its cross-market data and employ sophisticated automated surveillance technology to flag suspicious trading patterns. Firms will be able to add this data to their own surveillance and supervisory processes and take appropriate action to address the activity.
The reports to the firms are a preventive compliance measure that will operate in parallel with FINRA’s own surveillance process. FINRA will continue its current practice of investigating suspected manipulation and taking enforcement action, or referring the activity to the US Securities and Exchange Commission if the market participants in question are outside FINRA’s jurisdiction.
FINRA will leverage its cross-market data and automated surveillance technology to flag suspicious trading patterns.
The report cards are the first in a planned series focusing on cross-market manipulation and join an existing range of report cards covering such areas as trade reporting, best execution, audit trail reporting and Regulation NMS compliance.
In a parallel move to track trading activity in the US equity and options market, the Securities and Exchange Commission has also proposed a plan to create a single, comprehensive database known as the consolidated audit trail (CAT), and made a request for public comments, announced earlier this week.
The database will enable regulators to enhance the regulation and oversight of the trading markets while significantly increasing the ability of regulators to conduct research, reconstruct market events, monitor market behaviour and identify and investigate misconduct.