FINRA Proposes Requiring Registration of Algorithmic "Traders"
FINRA proposed that the associated persons ("APs") of a broker-dealer be required to register as Securities Traders if those APs are primarily responsible for (i) "the design, development or significant modification of algorithmic trading strategies," or (ii) the day-to-day supervision or direction of such activities. If the proposed classification is implemented, such persons will be subject to the qualification examination and continuing education requirements that are applicable to securities traders. FINRA stated that its "desired end" in creating the proposal was to address certain problematic conduct arising in algorithmic trading strategies, "such as failure to check for order accuracy, inappropriate levels of messaging traffic, wash sales, failure to mark orders as 'short' or perform proper short sale 'locates,' and inadequate risk management controls."
This rulemaking is part of a series of FINRA initiatives to address "high-frequency trading" and "equity-market transparency." Previously, FINRA submitted a version of this proposal for comment in Regulatory Notice 15-06.
Commentary
FINRA stated that it does not intend for the new registration requirement to affect any AP that "touches or otherwise is involved in the design or development of a trading algorithm." Instead, the rule would apply to APs who are "primarily responsible" for the development of the algorithmic trading strategy.
Those who click on the link and feel daunted by seeing a 200-page file should note that large chunks of the proposal consist of responses to the initial regulatory notice (including academic papers). Pages 3-15 comprise FINRA's discussion of the rules, pages 20-25 contain FINRA's response to commenters, and the text of the rules appears on pages 199-200.