FINRA Requests Comments on Proposal to Require Registration of Associated Persons Responsible for Algorithmic Trading Strategies (FINRA Reg. Notice 15-06)

FINRA issued a regulatory notice (the "Notice") soliciting comments on a proposal (the "Proposal") to require those associated persons who are primarily responsible for the design, development or significant modification of algorithmic trading strategies, or for supervising or directing such activities ("Algo Traders"), to register as "Securities Traders." The proposal is one of seven FINRA initiatives relating to equity market structure and automated trading activities.

For the purposes of the Proposal, an algorithmic trading strategy would include "any program that generates and routes (or sends for routing) orders (and order-related messages, such as cancellations) in securities on an automated basis" whether ultimately routed to an exchange or otherwise. As such, an order router alone would not constitute an algorithmic trading strategy for the purposes of the Proposal.

According to FINRA, the registration requirement would not apply to every associated person that touches or is otherwise involved in the design or development of a trading algorithm. Rather, the goal is to require firms to "identify and register one or more key persons who possess knowledge of and responsibility for both the design of the intended trading strategy and the technological implementation (e.g., coding) of that strategy, sufficient to evaluate whether the resultant product is designed not only to achieve business objectives, but also regulatory compliance."

FINRA is concerned that, in some cases, Algo Traders may lack adequate knowledge of the securities rules and regulations that are applicable to FINRA members, which could result in algorithms that do not comply with applicable rules. According to the Notice, FINRA already observed instances where algorithmic trading strategies have resulted in problematic conduct, such as failures to check for order accuracy, inappropriate levels of messaging traffic, wash sales, failures to mark orders as "short" or to perform proper short-sale "locates," and inadequate risk management controls. FINRA asserts that problematic conduct could be prevented through improved education regarding securities regulations for individuals involved in the algorithm development process. It proposes to apply NASD Rule 1032(f) ("Limited Representative – Equity Trader") registration requirements to Algo Traders.

Comments on the Proposal are due by May 18, 2015.

See: FINRA Reg. Notice 15-06.