Extended Hours Trading

Regulatory Obligations

Firms that participate in extended hours trading must comply with FINRA Rule 2265 (Extended Hours Trading Risk Disclosure), as well as with other FINRA and SEC rules applicable to such trading, including without limitation FINRA Rule 5310 (Best Execution and Interpositioning), and must ensure they meet their supervisory obligations for extended hours activity under FINRA Rule 3110 (Supervision).

FINRA Rule 2265 requires that firms that permit customers to engage in extended hours trading provide customers with a risk disclosure statement. In addition, if the firm permits customers to engage in extended hours trading online, or open accounts online in which the customer may engage in extended hours trading, the firm must post a risk disclosure statement on the firm’s website in a clear and conspicuous manner. The risk disclosure must address, at a minimum, the six specific risks identified in FINRA Rule 2265, and firms must also consider whether to develop and include additional disclosures as necessary to address product-specific or other specific needs.

Findings

  • Inadequate Supervision: Failing to maintain reasonably designed supervisory systems and controls, including with respect to the identification and reporting of potentially manipulative activity conducted in after-hours trading.1
  • Reporting Failures: Failing to report to FINRA’s Trade Reporting Facilities (TRF) or CAT required information arising from activity conducted during extended hours trading.

Effective Practices

  • Best Execution Reviews: Evaluating how extended hours orders are handled, routed and executed in regular and rigorous best execution reviews to confirm that the firm’s practices are reasonably designed to achieve best execution.
  • Customer Disclosures: Reviewing customer disclosures about the risks of extended hours trading to ensure that such disclosures address, at a minimum, the risks enumerated in FINRA Rule 2265; evaluating whether any additional product-specific or other disclosures may be necessary to address other risks related to extended hours trading; and reviewing any customer disclosures about the firm’s customer order handling procedures.
  • Supervisory Processes:
    • Establishing and maintaining reasonably designed supervisory processes that address any unique characteristics or risks of extended hours trading, such as customer order handling and volatile or illiquid market conditions.
    • Establishing reasonably designed supervisory processes that account for the mechanics and unique characteristics of overnight trading—such as venue-specific overnight price bands—and that contemplate supervisory reviews for scenarios that appear to reflect trades outside the bands, or trades that appear designed to set the bands in a potentially manipulative manner.
  • Operational Readiness, Customer Support and Business Continuity Planning: Evaluating unique operational readiness and customer support needs during overnight hours, as well as the availability of backup trading arrangements during trading sessions that are offered to customers and considering appropriate communications with customers about potential service interruptions.

Additional Resources

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1 See the Report’s Manipulative Trading topic for additional guidance.