As algorithmic trading strategies, including high frequency trading (HFT) strategies, have grown more widespread in U.S. securities markets, the potential for these strategies to adversely impact market and firm stability has likewise grown.
FINRA member firms that engage in algorithmic strategies are subject to SEC and FINRA rules governing their trading activities, including FINRA Rule 3110 (Supervision).
A reasonable supervision and control program may not prevent every possible failure. However, there are several effective supervision and control practices that firms can employ to reduce the likelihood and mitigate the impact of future problems. These practices including the following:
- General Risk Assessment and Response – Firm should undertake a holistic review of their trading activity and consider implementing a cross-disciplinary committee to assess and react to the evolving risks associated with algorithmic strategies.
- Software/Code Development and Implementation – Firms should also focus efforts on the development of algorithmic strategies and on how those strategies are tested and implemented.
- Software Testing and System Validation – Testing of algorithmic strategies prior to being put into production is an essential component of effective policies and procedures.
- Trading Systems – Firms should develop their policies and procedures to include review of trading activity after an algorithmic strategy is in place or has been changed.
- Compliance – Ensuring that there is effective communication between compliance staff and the staff responsible for algorithmic strategy development is a key element of effective policies and procedures.
Related: Market Access
FINRA's Office of General Counsel (OGC) staff provides broker-dealers, attorneys, registered representatives, investors and other interested parties with interpretative guidance relating to FINRA’s rules. Please see FINRA OGC Interpretative Guidance for more information.
OGC staff contacts:Alex Ellenberg and Racquel Russell
1735 K Street, NW
Washington, DC 20006