Algorithmic Trading Developers May Be Required to Register

The Financial Industry Regulatory Authority (“FINRA”) filed a proposed rule on February 11, 2016 with the U.S. Securities and Exchange Commission (“SEC”) requiring algorithmic trading developers to register as Securities Traders. The proposal would require individuals who design, develop or modify algorithmic trading strategies, as well as individuals responsible for the day-to-day supervision of algorithm development, to adhere to the same competency standards currently applied to other individuals registered with FINRA as Securities Traders.

Under the new rule, developers who are primarily responsible for the design of an algorithmic trading system would have to pass a qualification exam and register as a Securities Trader. The rule defines “algorithmic trading strategy” as any automated system that generates or routes orders, including hedging or loss-limit strategies, strategies that create or liquidate baskets of securities, and programs that divide large orders into smaller orders less likely to impact the market.

FINRA said this requirement would ensure the developers are properly educated in securities regulations in order to prevent problematic conduct like inaccurate orders or inadequate risk management controls. FINRA explained that the rule would not apply to every person involved in the design of a trading system and that it would be up to each firm to determine who is primarily responsible for the design of the system. An algorithm may cause violations of securities laws if appropriate safeguards are not built into the design and development phases of the system.

The SEC has 45 days to approve or reject the proposed rule change or initiate proceedings to examine the proposal. The SEC is currently soliciting comments on the proposal. It is important to note that the SEC is also considering rule changes that would require high-frequency proprietary traders to register with a national securities association, providing oversight of broker-dealers engaged in off-exchange trading. Moreover, the U.S. Commodity Futures Trading Commission proposed plans to regulate automated trading in the futures markets with new controls and registration requirements in November of 2015.

To read the proposed rule change, please go to the link below: http://www.finra.org/sites/default/files/SR-FINRA-2016-007.pdf

If you have questions about this Alert, please contact Daniel Viola at 212.573.8038, dviola@sglawyers.com.

Date: 02/18/2016
Type: Alerts
File: Click To Download