FINRA Chief Risk Officer and Head of Strategy Discusses Ethics, Risk and Regulatory Issues and Initiatives (with Lofchie Comment)

At the NSCP 2014 National Conference, FINRA Chief Risk Officer and Head of Strategy Carlo di Florio delivered remarks about algorithmic trading, transparency and conflicts of interest.

According to Mr. Florio, market quality and integrity are "stronger today than ever before" (broadly speaking); however, the way in which markets are regulated needs to evolve and be modernized continuously. One example, he explained, is the regulation of algorithmic trading. Mr. Florio said that FINRA and the SEC are assessing whether firms' testing and controls related to high-frequency trading and other algorithmic trading strategies are adequate and compliant.

Concerning regulatory initiatives to address algorithmic trading, he mentioned FINRA's recent proposal to require those who design, develop, or direct the modification of an algorithmic trading strategy and those who supervise these functions to register with FINRA. He also stated that FINRA will publish guidance reminding firms of their existing supervisory obligations with regard to the development and deployment of algorithmic trading strategies. Furthermore, Mr. Florio explained, FINRA is increasing its cross-market surveillance and using new data analytics, such as the implementation of the Consolidated Audit Trail ("CAT"), to monitor markets more efficiently. He stated that a bidder to develop the CAT processor is expected to be selected in the coming months.

To increase market transparency, Mr. Florio explained, the SEC and FINRA are proposing a series of rules to increase the scope of trading information that FINRA receives to enhance FINRA's oversight of high-frequency traders. One of the proposals would expand the dark pool volume information that FINRA began disclosing in June 2014. Mr. Florio stated that FINRA would publish the volume information on equity securities in the OTC market that has been reported to FINRA's equity trade reporting facilities. He also cited the proposed Comprehensive Automated Risk Data System ("CARDS") as an example of how FINRA plans "to use the modern technological resources to enhance the scope of data" received and analyzed. Comments on the CARDS proposal are due by December 1, 2014.

Mr. Florio concluded with a discussion of conflicts of interest, stating that "the biggest impact on how the industry manages and addresses conflicts of interest is an organization's culture." He explained that a firm must send a clear message and reinforce that message by rewarding ethical behavior and punishing unethical behavior regarding conflicts of interest. He cited FINRA's 2013 "Report on Conflicts of Interest," which stated that there is no one-size-fits-all approach to managing conflicts and explained what should be considered when devising an effective conflicts-of-interest framework.

Lofchie Comment: Whether some benefit will come from registering algorithmic programmers with FINRA is uncertain; however, regulators should not criminalize technology failures by bringing enforcement actions whenever there is a technology mishap. The imposition of a regulatory scheme to govern technology usage should be designed to facilitate the sharing of information to reduce failures.

See: Mr. Florio's Speech. Related news: FINRA Requests Comment on Rule Proposal to Implement CARDS (FINRA Reg. Notice 14-37) (with Lofchie Comment) (September 30, 2014).