Category: FINRA

Regulatory Giants Discuss Disaster Recovery Relief in Regards to Sandy

Hurricane Sandy took a physical toll on New York City, but a joint meeting of the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), and the Commodity Futures Trading Commission (CFTC) on the topic of disaster recovery, proved that it’s not just physical damage that companies are worried about.

Hurricane Sandy, which touched down in New York City on October 28th and 29th, disrupted several equities and options markets. On August 16th, 2013, officials from these regulatory giants met to discuss further improvements that can be made to stem the effects another natural disaster may have on the financial systems. Based on their discussion, they proposed a three point best practices of disaster recovery which is posted on the CFTC website.

The first point of their “Business Continuity Planning” paper is “Widespread Disruption Considerations,” which advocates that firms that might be affected by power outages, etc., take any natural disaster into consideration. Certain issues became very apparent during Hurricane Sandy, such as lack of remote access, which relies on internet and phone communication.

The second part of their three point continuity plan is the “Alternative Locations Considerations” which recommends that equities and options firms take precautions by thinking of a potential secondary location that won’t be disrupted in case of a ‘regional’ outage, such as was witnessed during Sandy. This section includes important issues such as power generators, staffing, adequate resources and shuttle services. Lastly, the committee advocates evaluating vendor relations, including services such as settlement, banking and finance.

A full version of the “Business Continuity Planning” can be found on the CFTC website.

FINRA Targeting High Frequency Trading in Probe

The Finance Industry Regulatory Authority (Finra) is looking into how trading firms self-regulate their algorithms used for High Frequency Trading.

In response to several high profile anomalies in the trading market due to High Frequency Trading (HFT) in the past year, the Finance Industry Regulatory Authority (Finra) has been looking into several trading firms with how they use and control their trading algorithms. One of those notable anomalies included an incident where a capital group lost about 10 million dollars per minute because of a malfunctioning computer system. This example has become a cautionary tale for many in the industry, but it appears that Finra fears the HFT industry might not self-regulate enough.

According to an article in Bloomberg, Finra’s letter to 10 firms included specific questions regarding High Frequency Trading algorithms, including whether or not there were kill switches, and under what circumstances they would be utilized.

As a document from Finra said, according to Bloomberg, “In light of several high-profile algorithmic trading failures that caused significant market disruption in 2012, Finra continues to be concerned about how firms are supervising the development of algorithms and trading systems.”

Full documents can be found on the FINRA website.


CFTC, SEC Face Data-Deficit in Coming High-Frequency Trading Fight

The U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC) now have FINRA, the financial industry’s self-regulator body, helping to crack down on high-frequency trading (HFT). Yet, barring unforeseen technological changes or a reallocation of resources, it remains to be seen whether 2013 will become the year of HFT regulation.

SEC and Real-Time: Does it Matter for HFT?

Reportedly, the SEC will begin streaming real-time trade data into its headquarters this month.

The SEC’s new technology will reportedly cost $2.5 million in the first year. The adoption of new technology comes on the heels of an announcement by ASIC, the Australian Securities Investment Commission, that it will use high-frequency trading technologies in order to monitor HFTs.

Although the technology itself may help the SEC cover a lingering resources gap, it remains to be seen how the data will be used to monitor trading entities. There is also some speculation as to whether the SEC is currently staffed with analysts who can process the data.

Bad Data or No Data: Enter Kirilenko of CFTC

As it stands, arguments for unregulated HFT stand on a mountain of dubious or unverified analysis. Defenders of HFT routinely cite studies whose authors can be traced back to HFT funding; for example, James Angel, professor at Georgetown, later admitted that HFT data is a “big jumble” even though he published a report in favor of HFT for Knight Capital. This, of course, was prior to the flash crash earlier this year. Or there’s the case of Christopher Culp, hired by Virtu Financial LLC, who wrote a study against transaction taxes, the Wall Street Journal reports.

On the other hand, aside from a landmark study from CFTC economist Andrei Kirilenko, U.S. regulators have put together scant data on the vices of HFT.

The virtue of real-time data (in the hands of U.S. regulators) could be to clarify once and for all the positive or deleterious effects of HFT.

FINRA Comes Out Swinging

Today, FINRA announced their plan to crackdown on HFT and dark pools. TheWall Street Journal reports:

Finra on Tuesday said it implemented a system in 2012 that can track trading patterns that “address more than 50 threat scenarios” across about 80% of the stock market.

Read more.

Proposed Consolidated Audit Trail Could Impact High-Frequency Traders

An SEC official said Thursday that the commission is close to proposing new rules for a consolidated audit trail of activity across national stock exchanges, calling it “a top priority.”

The proposed changes are expected to hit high-frequency trading firms hardest. That’s because costs of the consolidated audit trail, or CAT, would be spread across all firms in the national market system, as well as waves of orders sent to exchanges by high-speed automated trading systems.

“Historically, with a lot of the NMS plans, trades have been how you allocate costs among markets. And I think one of the issues we’re going to be dealing with is, given the nature of CAT,” is cost allocation, said Thomas Gira, Executive Vice President for Market Regulation at the Financial Industry Regulatory Authority.

High-frequency traders are know for placing thousands of orders, then canceling most of them before making a single trade. Because exchanges bear the burden of these orders in the form of storage and retrieval costs, a more blended cost allocation method must involve high frequency traders taking on part of that burden.

The CAT is estimated to cost $4 billion to build and $2 billion per year to operate.

Read more about the proposal.

photo credit: Mike Baird

Senators push for finalized Volcker Rule

22 senators wrote a letter to five federal agencies Thursday, calling for regulators to adopt a final Volcker rule free from loopholes and Wall Street concessions.

“You have no doubt heard, as we have, from those who would like us to forget the causes of the financial crisis and forget the causes of the financial crisis,” the senators wrote. Another, similar letter is circulating in the House.

The financial industry has been attempting to delay the rule. Under the rule, banks will no longer be allowed to place speculative bets with their own money.

“The Volcker Rule is a critical protection to help ensure that such a crisis does not happen again,” the letter said. It was authored by two Democratic Senators, Carl Levin of Michigan and Jeff Merkley of Ohio.

The final comment period on the Volcker Rule ended in February, a few months after regulators introduced a second draft. The Federal Reserve, the Securities and Exchange Commission, the Federal Deposit of Insurance Corporation, the CFTC and the Office of the Comptroller of the Currency have all received letters and comments from Goldman Sachs and other big banks critical of the Rule.

Read more about the Vocker Rule.

Photo credit: Vinoth Chandar

Lawyers tussle over ‘financial conspiracy’ evidence in McCrudden case

Defense counsel for disgruntled former hedge-fund manager and commodities trader Vincent P. McCrudden will argue before a judge that he should be allowed to show evidence of financial conspiracy theories at his trial next week. McCrudden has been charged with “transmission of threats to injure” after sending vicious threats to 47 current and former officials involved in financial regulation.The defendant allegedly sent menacing emails and published “execution lists” on his website, targeting prominent figures like the SEC’s Mary Schapiro and the CFTC’s Gary Gensler.

McCrudden’s lawyer, Bruce A. Barket, says that he will contextualize his client’s rage with evidence that his statements are part of a broader mainstream political debate. Government lawyers, however, have moved to preclude evidence for this argument, insisting that “the defendant offers no logical connection between his threats to kill more than 40 people and the vague beliefs of unidentified members of an undefined group.”

The source of McCrudden’s most recent outburst was a 2010 enforcement action by the CFTC, claiming that the defendant was operating as an unlicensed commodity pool operator (“CPO”). The unregistered CPO fired back by posting an execution list on his website and and allegedly writing an email to Dan Driscoll of the NFA informing him that hitmen were on the way: “It wasn’t ever a question of ‘if’ I was going to kill you, it was just a question of when.” The email was signed “Gary Gensler”, but originated from Singapore, where McCrudden was living at the time.

The defendant has a checkered regulatory history. In 2000 he was accused of masking shortfalls at his hedge fund by doctoring account statements, and he was tried (but acquitted) for mail-fraud in 2003. In 2005 he was denied NFA registration because of his criminal past, and in 2009 FINRA found that he had convinced a hedge fund where he worked to report he left voluntarily when he was actually fired.

Read more about the McCrudden case.
Creative Commons License photo credit: ogimogi

SEC and FINRA issue investor alert on structured notes with principal protection

As part of an on-going effort to raise the public IQ on financial products, the SEC’s Office of Investor Education and Advocacy and FINRA jointly issued an investor alert called “Structured Notes with Principal Protection: Note the Terms of Your Investment” to educate potential investors of the risks associated with this particular. The retail market for structured notes has grown tremendously, and though they are often advertised as safe, they are by no means risk free.

A structured note generally combines a zero-coupon bond (a bond which pays no interest until maturity) with a related option or derivative. The asset, index, or benchmark underlying that derivative can vary widely, and the investor is liable the the change the value of that asset. However, in may instances their upside exposure (i.e. potential for profit) is capped.

Furthermore, though principal protected structured notes usually will bring the investor some return, the level of protection varies. Some guarantee is less than ten percent–and even a higher guarantee is only worth as much as the company making it.

Says the Director of the SEC’s Office of Investor Education and Advocacy: “Structured notes with principal protection contain risks that may surprise many investors and can have payout structures that are difficult to understand. This alert is a ‘must read’ for investors considering these products, especially those with the mistaken belief that these investments offer complete downside protection.”

Furthermore, the higher the potential yield, the more complex and potentially hazardous the investment. As FINRA Senior VP for Investor Education John Gannon notes, “The current low interest rate environment might make the potentially higher yields offered by structured notes with principal protection enticing to investors. But retail investors should realize that chasing a higher yield by investing in these products could mean winding up with an expensive, risky, complex and illiquid investment.”

Read more about this SEC / FINRA investor alert.


U.K.’s Financial Services Authority (FSA) and the U.S.’s Financial Industry Regulatory Authority (FINRA) enter into a Memorandum of Understanding (MOU) today whereby the two countries agree to facilitate exchange information on firms and individuals under their supervision, support collaboration on investigations and enforcement matters, and allow further sharing of regulatory techniques including approaches to risk-based supervision of firms.

FSA’s managing director of supervision, Jon Pain, and FINRA’s  Chairman and CEO, Richard Ketchum, signed the MOU.


FINRA and IIROC warn about leveraged and inverse ETFs

FINRA and IIROC remind firms of their sales practice obligations with regards to leveraged and inverse ETFs. ETFs that are designed to achieve investment objectives on a daily basis may not be suitable for many investors, and should not be marketed as if they were designed to positively or negatively track an underlying index or benchmark over a longer period of time.