2017 EXAMINATION FINDINGS REPORT

December 6, 2017

Order Capacity

FINRA observed that firms of all sizes that engage in an equities business sometimes failed to comply with the requirement to enter the correct capacity code (e.g., agency, principal, riskless-principal) when reporting an off-exchange trade to a FINRA equity trade reporting facility.22

Specifically, FINRA observed firms that failed to reasonably address requirements in the development and programming of recordkeeping and order entry systems, maintain written supervisory procedures reasonably designed to achieve compliance with trade reporting rules, adequately train employees with respect to the significance of properly marking capacity in order entry systems, and adequately supervise employees with respect to the proper marking. These failures resulted in, among other issues, deficiencies in the proper marking and reporting of numerous orders or executions by firms’ proprietary or vendor-provided systems.

In the case of equity reporting to a FINRA facility, FINRA continued to identify firms that incorrectly reported riskless principal transactions as agent, or agency transactions as riskless principal transactions. These errors reflected some firms’ misunderstanding of the key distinction between agency and riskless principal transactions: the former do not traverse through the firm’s principal accounts, unlike principal and riskless principal transactions.

End Notes

22 The FINRA/Nasdaq TRF, FINRA/NYSE TRF and OTC Reporting Facility are collectively referred to herein as the "FINRA Facilities.".