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.
2021 Report on FINRA’s Examination and Risk Monitoring Program
The Cybersecurity and Technology Governance section of the 2021 Report on FINRA’s Risk Monitoring and Examination Activities (the Report) informs member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations, including (1) relevant regulatory obligations and related considerations, (2) exam findings and effective practices, and (3) additional resources.
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 Interpreting the Rules for more information.
OGC staff contacts:
- FINRA Rules
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- SEC Approves Rule to Require Registration of Associated Persons Involved in the Design, Development or Significant Modification of Algorithmic Trading Strategies
- Guidance on Effective Supervision and Control Practices for Firms Engaging in Algorithmic Trading Strategies
- FINRA Requests Comment on a Proposal to Require Registration of Associated Persons Involved in the Design, Development or Significant Modification of Algorithmic Trading Strategies
- Rules Requiring the Identification of Non-Member Broker-Dealers in Order Audit Trail System (OATS) Reports and the Reporting of Additional Order Information by Alternative Trading Systems (ATS)
- FINRA Requests Comment on a Proposal to Identify OTC Equity Trades Reported More Than Two Seconds After Execution as "Out of Sequence" and Not Last Sale Eligible
- FINRA Requests Comment on a Proposal to Tighten Business Clock Synchronization Requirements
- FINRA Requests Comment on a Proposal to Publish OTC Equity Volume Executed Outside Alternative Trading Systems
- SEC Approves FINRA Rule Concerning Self-Trades
- Targeted Examination LetterThe Trading Examinations Unit (“TEU”) within the Trading and Market Making Surveillance (“TMMS”) group of the Market Regulation Department at FINRA is conducting a review of the Firm’s controls and processes in connection with the development and use of trading algorithms , as well as controls surrounding automated trading technology.July 01, 2013
- 2021 Report on FINRAs Examination and Risk Monitoring ProgramThe Cybersecurity and Technology Governance section of the 2021 Report on FINRA’s Risk Monitoring and Examination Activities (the Report) informs member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations, including (1) relevant regulatory obligations and related considerations, (2) exam findings and effective practices, and (3) additional resources.
- FINRA Charges Wedbush Securities for Systemic Market Access Violations, Anti-Money Laundering and Supervisory DeficienciesAugust 18, 2014
- FINRA Joins Exchanges and the SEC in Fining Hold Brothers More Than $5.9 Million for Manipulative Trading, Anti-Money Laundering, and Other ViolationsSeptember 25, 2012
- FINRA Sanctions Trillium Brokerage Services, LLC, Director of Trading, Chief Compliance Officer, and Nine Traders $2.26 Million for Illicit Equities Trading StrategySeptember 13, 2010