The FINRA Board of Governors (the “Board”) met last week to discuss a number of upcoming rule proposals and initiatives, many which focus on high-frequency trading and market transparency. FINRA Chairman and CEO Rick Ketchum stated that he believes these proposals address Securities and Exchange Commission (“SEC”) Chair Mary Jo White’s call to action for market transparency, which we have written about previously on our website and in one of our past blog posts, and allow FINRA the ability to concentrate its work on areas where it can have the greatest impact on investors. We have highlighted some of the items discussed by the Board below, however, a full summary of the topics addressed at the meeting can be found on FINRA’s webpage.
Equity Trading Initiatives
The Board addressed several initiatives in the equity trading market. The Board authorized FINRA to request comment from its members on a proposal that would require alternative trading systems (“ATSs”) to provide FINRA with order book information that is not currently reported. If the proposal is adopted, this information would be reported using FINRA’s existing Order Audit Trail System (“OATS”) interfaces. The Board also authorized FINRA to publish a proposal that would expand FINRA’s recently implemented transparency initiative in which ATS volume is disclosed, by also publishing non-ATS over-the-counter trading volume. FINRA was also authorized to request comment on a proposal that would require FINRA member firms to report the identity of non-member broker-dealers to OATS when receiving orders from such entities.
In addition, the Board approved the publication of a trade sequencing proposal that would identify over-the-counter trades in NMS stocks reported more than two seconds following trade execution. These trades would be identified as “out-of-sequence” and therefore the trades would not update the last sale price disseminated by the securities information processors (“SIPs”). Under the proposal, FINRA trade reporting facilities would append a special indicator to the trades identifying them as “out of sequence” before sending them to SIPs.
The Board further authorized FINRA to publish a notice to its members reminding them of their supervisory obligations with respect to the development of algorithmic trading strategies. The notice will provide guidance regarding effective controls and practices to monitor for and prevent adverse impacts on the market. A FINRA notice will also be published seeking comment on proposed registration requirements for associated persons who are primarily responsible for the design and development, or supervision, of algorithmic trading strategies.
Fixed Income Market Initiatives
The Board also discussed fixed income market initiatives. At the meeting, FINRA was authorized to publish a proposal that would require ATSs to report to FINRA quotation information for corporate bonds and agency debt securities. Under the proposal, this information would include the identity of the party that submitted the quotation and the price of the quotation. FINRA also intends to solicit comment on whether FINRA should publicly disseminate this information.
FINRA was also granted approval to publish a proposal developed in consultation with the SEC and the Municipal Securities Rulemaking Board (“MSRB”) that would require FINRA members to provide confirmation disclosure of pricing information in same-day principal trades of retail-size. Under the proposal, member firms would be required to disclose information relating to the price of the firm leg and the customer leg of the transaction for trades involving 100 bonds or less.
In addition, the Board authorized FINRA to file with the SEC a proposal to require member firms to identify in Trade Reporting and Compliance Engine (“TRACE”) trade reports all transactions with non-FINRA member affiliates and to identify when those transactions occur intra-day at the same price.
At the meeting, FINRA was also authorized to seek comment on a proposal that would require recruiting FINRA member firms to provide educational materials to retail customers of a transferring representative, who are considering transferring assets to the recruiting member firm. The educational materials would be established by FINRA and would highlight the potential impact of transferring assets to a new broker-dealer as well as sample questions that a customer may want to ask the recruiting firm in order to make an informed decision before transferring his or her account.