FINRA Trying to Be More Transparent; No Easy Trick

finra-effort-more-transparent-

Brokerdealer regulator FINRA trying to be more transparent is no easy trick considering that its constituency is often conflicted when it comes to the topic of disclosure and visibilty, but industry veteran Tom Gira, EVP of Market Regulation is putting his best foot forward.

(Traders Magazine) –Nov 19–The Financial Industry Regulatory Authority is right on top of the evolving financial market structure and to that end, has announced new initiatives designed to increase market transparency.

The Financial Industry Regulatory Authority is right on top of the evolving financial market structure and to that end, has announced new initiatives designed to increase market transparency.

Thomas Gira, Executive Vice President, Market Regulation at FINRA, laid out the regulator’s future plans in remarks made Tuesday, November 15 at the Inaugural Traders Magazine Equity Market Structure Town hall forum at the Upper Story in New York City. In speaking to the audience, he assured that the group is on top of changes in the market and seeks to continue to provide clarity, guidance and transparency into the trading markets.

tom-gira-finra-market-regulation

Tom Gira, FINRA EVP Market Regulation

Gira provided a brief recap of what initiatives have already been put into place, creating a “multi-faceted safety net for the markets and are designed to promote investor confidence.” Among the changes, he told of how regulators adjusted the market-wide circuit breakers, which give market participants an opportunity to assess their positions, valuation models and operational capabilities when extreme periods of volatility occur. On top of that, the marketplace now has a limit up/limit down regime, which addresses the type of sudden individual stock-price movements that the market experienced during the May 2010 flash crash.

Also, he reminded that the Securities and Exchange Commission has also passed the Market Access Rule, which requires firms entering orders into the market, or allowing their customers to enter orders into the market, to have pre-trade controls to avoid erroneous and duplicative orders and to establish pre-trade capital and credit controls on orders entered into the market, among other things. And most recently, the SEC implemented Regulation SCI to strengthen the technology infrastructure of the U.S. securities markets.

Prospectus.com team of capital markets experts and securities lawyers specialize in preliminary offering prospectus, secondary offering prospectus and full menu of financial offering memorandum document preparation. More information via this link

“In sum, I think we are rightly focusing on the evolution of the market more than whether there is something seriously wrong with the market,” Gira said. “So in that vein, I would like to focus on how FINRA is working to stay ahead of issues through our focus on transparency and by making use of innovative technology in our surveillance programs.”

Among the new transparency initiatives, FINRA is continuing to look at ways to expand its Trade Reporting and Compliance Engine, or TRACE, which looks at the trading of corporate bonds and their trade data, including the price and size. The system is now looking at expanding TRACE to include transaction and quote data for the $13 trillion Treasury market.

“There is currently no centralized trade reporting system for Treasuries. Regulators, including FINRA, the SEC, the Treasury Department and the Federal Reserve Board, have taken steps to implement a transaction-reporting regime for Treasuries,” he said. “Starting next July, firms will have to report certain transactions in Treasury securities to TRACE.”

At this time, he added FINRA will not disseminate information on transactions in Treasuries. This new requirement will significantly enhance the ability of FINRA and other regulators to understand trading activity in Treasury securities.

To continue reading this story by John D’Antona, Jr from Traders Magazine, click here

Continue reading

Wall Street Cops Turn to AI for Market Surveillance

ai-market-surveillance-finra-brokerdealer

FINRA Market Surveillance Crew Gets the “Artificial Intelligence Memo” After NASDAQ and LSE introduce AI tools to Monitor “Layering.”

(Reuters)–27 October-Artificial intelligence programs have beaten chess masters and TV quiz show champions. Next up: stock market cheats.

Two exchange operators have announced plans to launch artificial intelligence tools for market surveillance in the coming months and officials at a Wall Street regulator tell Reuters they are not far behind. Executives are hoping computers with humanoid wit can help mere mortals catch misbehavior more quickly.

The software could, for instance, scrub chat-room messages to detect dubious bragging or back slapping around the time of a big trade. It could also more quickly unravel complex issues, like “layering,” where orders are rapidly sent to exchanges and then canceled to artificially move a stock price.

A.I. may even sniff out new types of chicanery, said Tom Gira, executive vice president for market regulation at the Financial Industry Regulatory Authority (FINRA).

“The biggest concern we have is that there is some manipulative scheme that we are not even aware of,” he told Reuters. “It seems like these tools have the potential to give us a better window into the market for those types of scenarios.”

FINRA plans to test artificial intelligence software being developed in-house for surveillance next year, while Nasdaq Inc (NDAQ.O) and the London Stock Exchange Group (LSE.L) expect to use it by year-end.

Prospectus.com is an international specialist in securities offering prospectus documentation and recognized experts in the broad range of offering documents, from preliminary prospectus (“red herring”) documentation to final offering prospectus document writing.

Prospectus.com fees are typically 50% lower vs. fees charged by traditional securities law firms.

Schedule Your Free Consultation Today.

The exchange operators also plan to sell the technology to banks and fund managers, so that they can monitor their traders.

Artificial intelligence is the notion that computers can imitate nuanced human behavior, like understanding language, solving puzzles or even diagnosing diseases. It has been in development since the 1950s and is now used in some mainstream ways, like Siri, an application on Apple Inc’s (AAPL.O) iPhone that can engage in conversation and perform tasks.

While financial firms are already applying artificial intelligence software for everything from compliance to stock-picking, it is only starting to become useful for market oversight.

“We haven’t really let the machines loose, as it were, on the surveillance side,” said Bill Nosal, a Nasdaq business development executive who is overseeing its artificial intelligence effort.

50 BILLION EVENTS

Market surveillance generally relies on algorithms to detect patterns in trading data that may signal manipulation and prompt staff to investigate.

But the sheer volume of data can lead to an overwhelming number of alerts, many of which are false alarms.

FINRA monitors roughly 50 billion market “events” a day, including stock orders, modifications, cancellations and trades. It looks for around 270 patterns to uncover potential rule violations. It would not say how many events are flagged, or how many of those yield evidence of misbehavior.

The “machine learning” software it is developing will be able to look beyond those set patterns and understand which situations truly warrant red flags, said Gira.

Machine learning is a subset of artificial intelligence in which computers figure out new tasks without having been programmed to do so. In the case of market surveillance, that would mean the computers “learn” which trading patterns lead to enforcement charges, in order to flag the right ones.

FINRA plans to test the new tool next year alongside its existing systems to compare the results.

The regulator has already moved its surveillance systems to Amazon.com Inc’s (AMZN.O) web-based Cloud, giving it more computing power to quickly analyze massive data.

Nasdaq is working with cognitive computing firm Digital Reasoning, which it invested in earlier this year.

LSE has teamed up with International Business Machine Corp’s (IBM.N) Watson business and cyber-security firm SparkCognition to develop its A.I.-enhanced surveillance, Chris Corrado, chief operating officer of LSE Group, told Reuters in an interview. Watson has become something of a household name, having bested contestants in the game show “Jeopardy” in 2011.

To continue reading, click here

 

FINRA Election Mirrors Presidential Race?

Bob Much FINRA Board Member

Ex-Bear Stearns Partner Pledges To Make FINRA Great Again

FINRA, aka Financial Industry Regulatory Authority, the SRO that serves as overseer of the securities brokerage industry and broker-dealers at large has completed the election campaign and voting process for electing individuals to its Board and the election winners include a former Bear Stearns partner as well as a current senior exec of hedge fund complex Bridgewater Associates.

Per WSJ-The chief executive officer of a San Francisco investment bank prevailed in a hard-fought election to join the board of Finra, the front-line regulator of stockbrokers, knocking off an incumbent and a well-known challenger who campaigned on the message that rigid oversight is choking small firms.

Bob Muh, the CEO of Sutter Securities Inc. and a former Bear Stearns partner, narrowly defeated three other candidates to win a seat on the board of the Financial Industry Regulatory Authority. He beat the second-place candidate, Stephen Kohn of Lakewood, Colo., by just three votes, according to people familiar with the matter. Robert Keenan, a sitting board member who also upset an incumbent when he won his last election in 2013, placed third. Mark Howells, a broker based in Scottsdale, Ariz., also competed in the race.

Finra, one of the country’s most powerful financial regulators, allows the industry it oversees to elect some of its officers. While Finra isn’t a government agency and ultimately answers to the Securities and Exchange Commission, Congress has sanctioned its role as a standard-setter and rule-enforcer for the brokerage industry.

Finra’s bylaws require that a majority of its 24-member governing board have no industry ties. But Finra reserves three board seats to represent its 3,550 small-firm members. That board structure has fostered the unusual dynamic of candidates campaigning for office at the overseer by vowing to lighten its oversight.

Turnout in the election was about 43%, meaning about 1,500 of Finra’s small-firm members voted, people familiar with the matter said. (For the full WSJ article, click here)

A more colorful take on the above is courtesy of DealBreaker’s Jon Shazar:

t may surprise you (but probably shouldn’t) to learn that there are some people who think FINRA’s doing too good and too thorough a job regulating broker-dealers. That it’s really nobody’s business if a broker levies an unspoken lap dance fee. That its website is actually too up-to-date and too easy for clients to use to find out about the levying of unspoken lap dance fees. That the problem isn’t FINRA’s habit of whitewashing what broker records are available, but that there are just too many disciplinary actions being taken that require whitewashing. These people are called FINRA members, specifically its 3,550 small-firm members. And because self-regulation is a hilarious carnival of ineptitude and bad optics, these small firms get to elect a representative to FINRA’s board, to represent their interest in going unregulated to the greatest extent possible.

These triennial contests have all the hallmarks of a real political campaign: websites, mudslinging, throw-the-bums-out mentalities. Unsurprisingly, they also look an awful lot like a local Tea Party meeting, with candidate trying to one-up the other in making deregulatory promises they’ll never be able to keep in the face of the 23 other FINRA board members who don’t think it’s a great idea to provocatively antagonize customers, the press and the Securities and Exchange Commission at every turn.

This year, the bum getting thrown out was Robert Keenan, elected three years ago on the platform that the previous bum wasn’t doing enough to get these regulatory pencil pushers off their goddamned backs, and who was felled by the same sword. But the winner—who will get to serve alongside fellow new FINRA director and Bridgewater exec Eileen Murray—wasn’t the most fire-breathing of the candidate. Instead, by a margin of all of three votes out of 1,500 cast, the small folks of FINRA picked a 78-year-old former Bear Stearns, Bob Muh, partner to carry the doomed torch.

Mr. Muh, 78 years old, was seen as a moderate and experienced voice in a campaign in which Mr. Kohn accused Mr. Keenan of playing fast and loose with campaign rules and not pushing back hard enough against regulations that brokers oppose….

“I certainly can’t call it a landslide or a mandate, but I’m delighted I’ll have the chance to convince the independent directors on the board of some the changes that are need for the small firms,” Mr. Muh said in an interview Monday after Finra announced the results.

 

SEC Chair White Last Major Speech to BDs: Market Structure

mary jo white-sec-chair-brokerdealer

SEC Preparing to Finalize Transparency Rules for “Polluted” Dark Pools, Mary Jo White Says

Agency could alter 2015 proposal, which sought to pull back the curtain on opaque trading venues

In what might be her last major speech to members of the broker-dealer community as the Obama administration winds down and gets ready for the closing bell, SEC Chair Mary Joe White addressed a Washington DC gathering of the Securities Traders Association this week and talked about BDs favorite topic: equities market structure.  After taking a few accolades for approving Finra-recommended regulations that require software developers of algorithmic trading tools to be registered and licensed just as securities traders, Ms White  summarized her accomplishments  and forward looking perspectives regarding SEC efforts to address inequities in the equities market structure.

Courtesy of Mondo Visione, below are the opening extracts from Ms. White’s speech:

Thank you, Jim [Toes], for that kind introduction.  I am honored to join you again for your annual market structure conference.

The American equity markets are the strongest in the world, and one of the Commission’s most important responsibilities is to work every day to maintain their fairness, orderliness, and efficiency.  Optimizing market structure is a continuous process, one that requires the Commission to act with both care and intensity, strictly guided by what is best for investors and capital formation for public companies.

I emphasized this guiding principle when I last joined you in 2013,[1] and in 2014 when I laid out a program for enhancing equity market structure.[2]  Fulfilling our responsibility to investors and issuers, of course, demands that the Commission act quickly to address issues that are demonstrably undermining the interests of investors and issuers.  But it also requires the Commission to carefully consider changes to market structure where the impact on those interests is far less clear and the data to support competing perspectives is lacking or conflicting.

Where improvements to equity market structure are clearly called for, the Commission has acted.  The operational integrity of our markets – my top priority – has been significantly enhanced by a number of measures.  The staff is gathering and analyzing more market data than ever before to inform policymaking, and the consolidated audit trail is becoming reality.  And we have detailed proposals out for comment that will give investors more transparency into how the off-exchange markets operate and broker-dealers handle their orders.

At the same time, the Commission has undertaken a deliberate, data-driven process to assess – and, as appropriate, begun to implement – more fundamental changes to equity market structure.  This process requires great care.  The American equity markets today continue to serve well the interests of retail and institutional investors, delivering better executions at lower costs than ever before.  Broad changes to this market structure – especially those executed precipitously or without adequate data – can have serious unintended consequences for investors and issuers as their impact is fully realized, sometimes years down the road.

This two-pronged approach recognizes that market structure can never be perfect and, correspondingly, that the Commission’s work is never – and should never – be done.[3]  Market structure is continually evolving as technology and competition spur innovation.  That fluidity means that the Commission’s review must be both comprehensive and nimble, constantly testing existing assumptions, regulations, and market practices, while remaining poised to act quickly on issues that immediate attention can address.

Today, I want to report on some of our progress on both our targeted enhancements to tackle such issues, and our consideration of more fundamental market structure questions.  While the Commission has been active in a number of areas, I will focus today on operational integrity, market transparency, and algorithmic trading.

In assessing these areas and others, we have been fortunate to have the assistance of our relatively new Equity Market Structure Advisory Committee, or EMSAC.  Especially in addressing some of the more complex issues in market structure today, the EMSAC, which brings deep expertise and a wide range of perspectives, provides a public forum for valuable and timely discussions, both within the Committee itself and as a result of its efforts to reach out to a wide range of others with expertise on key issues.

Strengthening Operational Integrity and Market Stability

Let me begin where I always do, with operational integrity and market stability.  Since I arrived at the Commission, enhancing the reliability and resilience of our markets has been my top priority.  Weaknesses or disruptions in operations can destabilize markets and, in some cases, lead to extreme price volatility and the loss of investor confidence.  The Commission’s work here continues – we can never be complacent – but I am very pleased with the steps we have taken to strengthen the market systems on which investors depend every day.

Regulation SCI

Central to this effort has been Regulation SCI, which the Commission adopted at the end of 2014.[4]  While no measure can eliminate technology disruptions altogether, Regulation SCI is designed to reduce the occurrence of systems issues and to improve resilience and communication when systems problems do occur.  It imposes requirements on key market participants – the exchanges, high‑volume alternative trading systems (ATSs), clearing agencies, the securities information processors (SIPs), the Financial Industry Regulatory Authority (FINRA), and the Municipal Securities Rulemaking Board (MSRB).

These “SCI entities” were required to start complying with most of the requirements of Regulation SCI last November.[5]  In the first instance, this means maintaining comprehensive policies and procedures to ensure the capacity, integrity, resiliency, availability, and security of key automated systems.  It also means: taking appropriate corrective action when systems issues happen; reporting systems problems and changes directly to the Commission and market participants; and conducting periodic reviews and testing of automated systems.

Approaching the first full year of the regulation’s operation, our examiners have been reviewing compliance with Regulation SCI.  It is apparent from these examinations that many market participants have devoted significant resources to compliance, and there has been good progress in implementation.  But a few areas for additional attention have emerged.  For example, it is clear that processes for patching and updating systems deserve close attention – human errors in these routine tasks can create much more significant issues.  Another example is diversifying primary and backup systems – in seeking to fulfill their recovery obligations under Regulation SCI, market participants should focus on not just the geographic locations of those systems, but also consider their reliance on different electrical, telecommunications, and other infrastructure support.  Our staff is continuing to work with market participants in these areas and others to help ensure that the goals of Regulation SCI are achieved.

Improvements to Critical Market Infrastructure

Regulation SCI has been complemented by a number of initiatives by the exchanges and FINRA to enhance the operational integrity of critical market infrastructure like the SIPs and the open/close process.  At my direction, following the Nasdaq SIP outage in 2013 and NYSE’s trading outage in 2015, SEC staff worked with the exchanges and FINRA to correct the defects that caused these incidents, as well as to identify and address other potential single points of failure.  These cooperative efforts were expanded after the unusual volatility of August 24, 2015, and there has been significant progress.

  • First, the resilience of the SIPs is considerably improved.  There are now enhanced disaster recovery sites and systems to establish a “hot/warm” backup process, which provides for a failover from the primary site to the backup site in ten minutes or less.[6]
  • Second, as of June, the equity listing exchanges now have mutual backup arrangements for their closing auctions, which will address situations when a disruption might prevent the execution of a closing auction on the primary listing exchange.[7]
  • And third, the process for opening auctions, especially in volatile markets, has been and continues to be improved.[8] 

Enhancements to Volatility Moderators

Amidst these and other improvements,[9] reminders persist about the continued importance of the volatility moderators implemented after the “Flash Crash,” especially the “limit-up/limit-down” plan designed to reduce extraordinary volatility in individual securities.  The exchanges and FINRA have already implemented basic enhancements to limit-up/limit-down in the wake of the events of August 24, 2015,[10] and I have asked them to address additional issues that emerged during that event. 

Further Strengthening Market Operations

One such issue is the application of the mechanism to exchange-traded products (ETPs), where we have a broader program underway to help ensure that these increasingly popular products operate robustly in a variety of market conditions.  We saw during the Flash Crash and on August 24 that ETPs can be disproportionately affected when markets become disorderly.  Orderly trading in an ETP requires a smoothly functioning market for the ETP’s holdings so that market makers and authorized participants can reliably value the ETP’s portfolio.  If the underlying market becomes disorderly, or if market makers and authorized participants step away from trading, the arbitrage mechanism can be disrupted and an ETP can trade at prices substantially away from its implied value.

Commission staff, as well as the exchanges and FINRA, are assessing the special characteristics of ETP trading in determining whether particular changes should be made to the limit-up/limit-down mechanism to reflect the sensitivity of ETPs to disorderly market activity.[11]  In addition, I have directed the staff’s ETP Working Group to identify and analyze a broad range of issues relating to the structure, trading, and use of ETPs.  The Working Group is considering, among other things: what portfolio characteristics and market structures support effective arbitrage; the roles and practices of market makers and authorized participants; and the effects of the ongoing exchange pilot programs to incentivize trading in less‑liquid ETPs.

If you haven’t already fallen asleep and would like to read the entire transcript, please click here

Deutsche Bank Steps in Doo-Doo, Again!

broker-dealer-deutsche-bank-finra-fine

Germany’s Biggest Bank Banged $12.5 mil by Finra for Hooting and Hollering via Firm’s Squawk Box

For those not following the travails of Germany’s biggest investment bank and broker-dealer Deutsche Bank, suffice to say this bank has had its full share of comeuppance throughout the past many months. If nothing stings more than getting hit with a big fat fine from Finra, the sting is more palpable when its a $12.5 million smack for hooting and hollering confidential information over a company-wide ‘squawk box.’ Below courtesy of Business Insider columnist Portia Crowe:

(Business Insider) Aug 8-Deutsche Bank allowed potentially confidential research and trading information to be broadcast over internal speakers, according to the Financial Industry Regulatory Authority, or Finra.

That body fined Deutsche Bank $12.5 million after finding that the German bank was aware that broadcasts, known as “hoots” or “squawks,” contained potentially confidential or price-sensitive information but “repeatedly ignored red flags” suggesting it wasn’t adequately supervising the loud systems.

Traders regularly communicate across desks over internal speaker systems known as “squawk boxes.”

Global consultant Private Placement Services LLC offers a full suite of professional consulting and offering document preparation services for those seeking to raise money via a private placement of debt, equity or convertible securities. To learn more, visit PPM.co

At least one registered representative of the firm communicated potentially confidential and/or material nonpublic information to customers as a result of the supervisory deficiencies, according to a filing from Finra.

That provided the recipients with a potential informational advantage over other customers.

“Deutsche Bank’s disregard of years of red flags including internal audit findings, risk assessments, and compliance recommendations was particularly egregious given the risk that material nonpublic information could be communicated over squawk boxes,” Finra’s chief of enforcement, Brad Bennett, said in a statement.

Deutsche Bank neither admitted to nor denied the charges. The full story via this link to Business Insider