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26 May 2017
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FINRA’s Success Limiting Trading Manipulation

Today’s economy is seeing a drop in trading manipulation due to new initiatives set in place by FINRA. FINRA, or, the Financial Industry Regulatory Authority, is a “not-for-profit organization authorized by Congress to protect America’s investors by making sure the broker-dealer industry operates fairly and honestly.” This year at FINRA’s annual conference, Robert W. Cook, the President and CEO, reported the organization’s success in limiting layering, a type of trading manipulation, this creating a fairer industry.

Layering is an illegal method used by securities traders in high-frequency trading to manipulate stock prices by creating the appearance of either buying or selling securities.  They do this by placing multiple layers of orders that they ultimately do not execute. This will artificially alter the stock price to create more advantageous trading opportunities for the trader.  Unfortunately, this practice is difficult to monitor or prevent.

But in 2016, FINRA initiated a cross-market surveillance report card which detects trading fraud and manipulation, even when individuals are concealing their investments across multiple platforms. Firms usually conduct their own surveillance to detect unscrupulous trading activities, but FINRA has even greater reach and can review all trades that go through the U.S. stock market. During the conference, Cook explained that manipulative trading activity “can be very hard for any individual firm to detect, so we are now alerting members when our sophisticated surveillance programs flag a suspicious trading pattern.” However, not all suspicious trading is actually illegal activity. The purpose of FINRA’s technology is to alert firms of trades that should be reviewed and prompt them to take any necessary action. This reduces formal FINRA investigations as it allows firms to attack the issue at first appearance. Because of this new process, there has been a 68% drop in “layering exceptions.”

Critics have argued that although layering has been reduced, it has not necessarily stopped. Instead, traders could have found ways around FINRA’s detection technology, or broker-dealer firms could have simply dismissed clients with suspicious trades. Nevertheless, being able to detect this information early on has proven helpful to firms. Cook, in his speech, explained that this open flow of information between FINRA, member firms, investors and market participants, is the key to FINRA’s success in regulating manipulative trading practices.

FINRA is effectively finding ways to surveil fraudulent behavior, help firms meet compliance standards with FINRA and the SEC, and prevent cybersecurity risks. Due to FINRA’s achievements, it will be expanding this cross-market program within the year. It will also be producing new reports for firms before year’s end to give a rounded summary of their findings. Cook wants his organization to evolve with technology and policy “in order to be a nimble, more responsive regulator that adapts quickly and creatively to change.”

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