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Market surveillance a constant challenge: FINRA
May 17, 2016 / 8:21 PM / 2 years ago

Market surveillance a constant challenge: FINRA

NEW YORK (Reuters) - Surveillance of markets for illegal trading practices has become more difficult as technology evolves and manipulation strategies can stay one step ahead of regulators, according to an executive at Wall Street’s self-funded watchdog.

A sign for the Financial Industry Regulatory Authority (FINRA) is seen outside the offices in New York's financial district July 22, 2015. REUTERS/Brendan McDermid

Tom Gira, executive vice president for market regulation at the Financial Industry Regulatory Authority (FINRA) said at the Reuters Financial Regulation Summit on Tuesday he worries that as the agency discovers problematic trading patterns, bad apples in the market may adjust their strategies to stay a step ahead.

Gira also said he wants to obtain futures trading data so the agency can engage in more cross-product investigations.

“I worry what we find there is going to be the tip of the iceberg,” he said.

With the recent release of the first monthly report cards to member firms that deal with market manipulation, FINRA hopes to better shine a spotlight on and discourage illegal practices such as spoofing, or layering.

Spoofing involves faking orders for a security to deceive the market by creating the illusion of demand.

The report cards are based on the watchdog’s “cross-market” program, which monitors trades across stock exchanges. Gira told Reuters reporters that trading patterns unusual enough to trigger an alert to regulators make up as much as 1 percent of trades, and FINRA monitored some 50 billion trades a day.

“We’ve found people are getting more sophisticated, there is sort of a cat and mouse game where the firms can get picked off with multiple strategies,” Gira said.

FINRA is also starting to compile what it terms “cross-product patterns” comparing trading across different investment products, such as equities and options.

That data could point to cases of using a layering technique to advantage the option and interfere with the price in that market.

    Gira also said he hopes the hotly debated proposal to let U.S. stock exchanges delay order responses by less than a millisecond, paving the way for “Flash Boys” heroes IEX Group to become an exchange, moves forward next month, “in the interest of allowing innovation to continue to exist,” echoing earlier comments from FINRA head Robert Ketchum.

    IEX says it slows orders by 350 millionths of a second to prevent predatory traders using high-speed technology from picking up on trading signals and electronically front-running investors’ orders, a practice termed latency arbitrage. Author Michael Lewis chronicled IEX’s efforts in his book, “Flash Boys: A Wall Street Revolt.”

    The proposal has drawn criticism from industry participants and market operators, including the head of Nasdaq Inc (NDAQ.O), who said approval of the interpretation would greatly complicate the market and that exchanges would respond by creating thousands of new ways to execute orders.

    A ruling on the proposal is expected in mid-June.

    Follow Reuters Summits on Twitter @Reuters_Summits

    (For more summit stories, see) 

    Reporting by Chuck Mikolajczak; Editing by Meredith Mazzilli

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