WASHINGTON (Reuters) - A surveillance program by Wall Street’s self-funded regulator has seen a huge decline in alerts that may indicate potential market manipulation, after it launched a new initiative last year to help brokerages spot problematic clients.
Robert Cook, the chief executive at the Financial Industry Regulatory Authority, announced at the group’s annual conference on Wednesday that FINRA has seen a 68 percent drop in “layering exceptions,” or possible indications of a type of manipulative trade.
Last spring, FINRA said it would start alerting brokerage firms in monthly cross-surveillance report cards about cases where the regulator detected potentially manipulative trades by clients who were granted direct access to U.S. markets.
While most exchanges conduct their own surveillance, FINRA monitors activity across all U.S. stock and options exchanges, with the aim of catching fraudulent behavior spread across multiple trading venues.
The findings in the reports do not necessarily mean illegal trading has occurred.
But they alert firms about potential wrongdoing, and give them a chance to scrutinize their clients’ activities and take action early, before it morphs into a possible regulatory investigation down the road.
Layering is an illegal maneuver used to create the appearance of buying or selling interest in a way that will move the market to a trader’s advantage.
To accomplish that goal, a trader places multiple layers of prices on one side of an order with no intention of filling those orders.
The decrease in layering alerts “suggests to us that firms were able to use that information to track maybe what some customers were doing through them,” Cook told reporters on the sidelines of the conference Wednesday.
“It is demonstrating to us that giving people information early can have a potentially helpful effect for the markets.”
Cook told reporters that the 68 percent decline in alerts of possible layering does not necessarily mean there is less layering activity in the marketplace.
It could mean, for instance, that some traders have found ways to circumvent detection, or that brokers have dropped problematic customers.
Cook said in his speech that FINRA intends to expand its surveillance program by adding two new kinds of cross-market surveillance alerts in the near future.
The regulator also plans to give firms another new report later this year that will summarize FINRA’s key examination findings across different subject areas.
Reporting by Sarah N. Lynch; Editing by Andrea Ricci