The FIA Principal Traders Group submitted a comment letter to the Securities and Exchange Commission on Jan. 6, 2014 in response to a FINRA proposed rule change relating to self-trades.
FIA PTG expressed support for FINRA’s recognition that self-trades can occur without fraudulent or manipulative intent.
In addition, FIA PTG supported FINRA’s view that member firms have policies and procedures reasonably designed to review their trading activity for self-trades and prevent a pattern or practice of self-trades resulting from a single algorithm or trading desk or related algorithms or trading desks. In this regard, FIA PTG asked FINRA to clarify whether the presumption that trading strategies or algorithms are related if they are within “the most discrete unit” of a firm’s internal controls can be overcome and, if so, to provide guidance on the standards to which firms will be held in attempting to rebut this presumption.
Finally, FIA PTG requested that FINRA clarify what factors and circumstances would cause trades between unrelated trading strategies or algorithms to be considered not bona fide trades and to consider taking the same approach as CME Group in determining whether trades between unrelated algorithms are bona fide.
January 6, 2014
Elizabeth M. Murphy
U.S. Securities and Exchange Commission
100 F Street, N.E.
Re: File No. SR-FINRA-2013-036: Proposed Rule Change Relating to Wash Sale Transactions and FINRA Rule 5210 (Publications of Transactions and Quotations)
Dear Ms. Murphy:
The Futures Industry Association Principal Traders Group (“FIA PTG”1) appreciates the opportunity to comment on the Financial Industry Regulatory Authority, Inc.’s (“FINRA”) proposal to add supplementary material to FINRA Rule 5210 (Publication of Transactions and Quotations) (“Proposal”).2 The Proposal, as amended, would provide that securities transactions resulting from orders that originate from unrelated algorithms or separate and distinct trading strategies within the same firm would generally be considered bona fide transactions for purposes of Rule 5210. The Proposal would establish a presumption that algorithms or trading strategies within the most discrete unit of an effective system of internal controls are “related” and require FINRA members to have policies and procedures that are reasonably designed to review their trading activity for, and prevent, a pattern or practice of
FIA PTG supports the changes in FINRA’s amendment to the Proposal and appreciates FINRA’s attempt to codify contemporary industry practice while taking into account the realities market participants face in trying to limit unintentional
Second, FIA PTG very much supports FINRA’s view that member firms have policies and procedures that are reasonably designed to review their trading activity for
Finally, despite its overall support for the Proposal, as amended, FIA PTG has some concerns about FINRA’s presumption of the relationship between algorithms or strategies within the most discrete unit(s) of a firm. In addition, we request that FINRA clarify firms’ obligation to review their trading activity for, and prevent, a pattern or practice of
FIA PTG believes that the Proposal, as amended, takes an important step in the right direction by recognizing that there is a substantial difference between “wash trades,” for which there is a fraudulent or manipulative purpose, and
- Buy and sell orders for accounts with common beneficial ownership that are independently initiated for legitimate and separate business purposes by independent decision makers and that coincidentally cross with each other in the competitive market; or
- Buy and sell orders submitted by the same trading desk or unit that match despite best efforts to avoid
self-matching,due to the technical and operational limits of today’s matching engine technology. In most cases, exchange self-tradeprevention tools prevent these types of self-trades.
Without the requisite fraudulent or manipulative intent, these types of trades are not “wash trades” and FINRA’s change in terminology is an important clarification of this point.
Self-trades as bona fide transactions
FINRA Rule 5210 provides that no member may cause to be published or circulated any report of a securities transaction unless the member knows or has reason to believe that the transaction was a bona fide transaction. FINRA’s proposal is an attempt to clarify the types of
Although FINRA emphasizes that its focus is on
As you are aware, many FIA PTG members conduct trading simultaneously in both the futures and securities markets. Members, therefore, encourage regulators to institute
The Commission states that it believes that questions remain as to whether FINRA’s proposal is consistent with the requirements of Section 15A(b)(6) of the Securities Exchange Act of 1934 (“Exchange Act”). In particular, the Commission states that “FINRA’s proposal would appear to provide substantial flexibility with respect to the required policies and procedures, such that a significant number of
Section 15A(b)(6) of the Exchange Act requires the rules of a national securities association, such as FINRA, among other things, to be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest.8 In 2009, the Commission found that FINRA’s Rule 5210 is consistent with the Exchange Act, including the requirements in Section 15(b)(6).9 To approve FINRA’s Proposal, the Commission must find that the Proposal is consistent with the Exchange Act. The Commission is not required to find, as it implies it must, that the Proposal achieves FINRA’s stated purpose of addressing the identified problems associated with
B. FINRA’s Proposed Presumption that Certain Trades are Non Bona Fide
FIA PTG believes that FINRA’s amendment fails to clarify the standard that firms must meet in order for its trades to be considered bona fide transactions for purposes of Rule 5210. Multiple commenters noted that discrete units of a firm’s internal controls are established for reasons wholly separate from whether the trading strategies and algorithms within that unit are related. Nevertheless, FINRA’s amended proposal would continue to establish a rebuttable presumption that algorithms within those units are related.
FIA PTG believes this presumption reflects a misunderstanding of what constitutes a separate trading strategy/algorithm and the degree to which trading strategies/algorithms within the same unit interact. FINRA responded to comments regarding this concern by stating “that there should continue to be a rebuttable presumption that algorithms within the most discrete unit of a firm’s internal controls are related,”11 but fails to explain why this is necessary to further the purposes of its rule. As a result, FINRA’s Proposal, as amended, creates confusion over whether the presumption can be overcome and, if so, the standards that will be applied by FINRA to firms that attempt to overcome the presumption.
In its response to comments, FINRA states that it agrees that firms should be able to “attempt to demonstrate their compliance and rebut such a presumption.” However, in the same paragraph, FINRA states that it “believes it is unlikely that in such situations firms will be able to rebut the presumption that algorithms are ‘related.’” Further confusing this issue, FINRA continues by stating that it “clarifies that, notwithstanding a presumption that such algorithms are ‘related,” firms are permitted to attempt to demonstrate that two or more algorithms within the most discrete unit of a firm’s internal controls, such as an aggregation unit, are not ‘related.’” FIA PTG strongly disagrees that this explanation in FINRA’s response to comments, which accompanies its amended Proposal, does anything to “clarify” the standards to which firms will be held.12
At a minimum, FINRA should provide clear guidance on factors that would rebut the presumption of relatedness. For example, when the SEC adopted Regulation SHO, it provided the market with clear guidance on factors that could be used to verify the independence of a firm’s aggregation units.13 In this case, FIA PTG believes FINRA should amend its Proposal to recognize that relatedness could be rebutted by, for example, evidence that an algorithm/strategy operates as an independent decision maker as to when it should buy or sell a security or calculates profits and losses independent of other algorithms or strategies.
C. Pattern or Practice
FINRA’s proposal would require members to have policies and procedures reasonably designed to review their trading activity for, and prevent, a pattern or practice of
FIA PTG would like to thank the Commission and FINRA for the opportunity to comment on the Proposal. We look forward to working with the Commission and FINRA to make further improvements to these requirements. If you have any questions about these comments, or if we can provide further information, please do not hesitate to contact Mary Ann Burns (email@example.com).
Futures Industry Association Principal Traders Group
Mary Ann Burns
Chief Operating Officer
Futures Industry Association
cc:Mary Jo White, Chairman Luis A. Aguilar, Commissioner
Daniel M. Gallagher, Commissioner Kara M. Stein, Commissioner Michael S. Piwowar, Commissioner
John Ramsey, Acting Director, Division of Trading & Markets James Burns, Deputy Director, Division of Trading & Markets
1. FIA PTG is composed of firms that trade their own capital on the U.S. futures and equities exchange markets. FIA PTG members engage in manual, automated, and hybrid methods of trading, and are active in a variety of asset classes, such as foreign exchange, commodities, fixed income, and equities. FIA PTG member firms are direct participants on equities and options markets, and membership includes firms registered as broker-dealers, many of whom are registered as designated market makers on various national securities exchanges. FIA PTG member firms serve as a critical source of liquidity to U.S. markets, allowing those who use such markets, including individual investors, to manage their risks and invest effectively by allowing them to enter and exit markets efficiently.
2. See Securities Exchange Act Release No. 70966 (Dec. 3, 2013), 78 FR 73900 (Dec. 9, 2013), at 73904 (Notice of Filing of Amendment No. 1 and Order Instituting Proceedings to Determine Whether to Approve or Disapprove); Securities Exchange Act Release No. 70276 (Aug. 28, 2013), 78 FR 54502 (Sept. 4, 2013) (“Notice of Proposal”).
4. Notice of Proposal, supra note 2, at fn 5.
6. For example, when the SEC adopted Regulation SHO, it provided the market with clear guidance on factors that could be used to verify the independence of a firm’s aggregation units. See Securities Exchange Act Release No. 50103, footnote 25.
7. Notice of Filing of Amendment No. 1 and Order Instituting Proceedings to Determine Whether to Approve or Disapprove, supra note 3, at 73904.
8. 15 U.S.C.
9. See Exchange Act Release No. 60835 (Oct. 16, 2009) (approving
10. In its original proposal, FINRA articulated the concern that
13. See fn 6.