FINRA Proposed Rule on Wash Sale Transactions (with Lofchie Comment)

FINRA has filed a proposed rule change to add to Rule 5210 ("Publication of Transactions and Quotations"). The rule change will emphasize that wash sale transactions are generally non-bona fide transactions and that members have an obligation to have policies and procedures in place to review their trading activity for, and to prevent, wash sale transactions.

Lofchie Comment: Here is the key language from the proposed rule (emphasis added): "Transactions that originate from unrelated algorithms or separate and distinct trading strategies within the same firm would generally be considered bona fide transactions and would not be considered wash sales, even if the transactions did not result in a change of beneficial ownership, unless the transactions were undertaken for manipulative or other fraudulent purposes. Algorithms or trading strategies within the most discrete unit of an effective system of internal controls at a member firm are presumed to be related (e.g., within an aggregation unit, or individual trading desks within an aggregation unit separated by reasonable information barriers, as applicable)."Based on the language in bold, many firms that use algorithms will be required to consider how to reduce unintended internal matching.

See: Text of Proposed Rule Change; Proposed Rule Change Announcement. See also: MFA Submits Comments on Proposed Wash Trade Advisory (with Lofchie Comment) (August 14, 2013); CFTC Seeks Comment on CME Advisory Notice Regarding Wash Trades (July 15, 2013).