By Joanne Cursinella, J.D.
At the recent MarketsMedia/Traders Magazine Equity Market Structure Town Hall Forum, Thomas Gira, FINRA’s executive vice president of Market Regulation, dedicated his remarks to how FINRA is concentrating on the evolution of the market by its focus on transparency and by making use of innovative technology in its surveillance programs.
Transparency. FINRA has a long history of bringing transparency to the equity and bond market, Gira said. He noted that the Trade Reporting and Compliance Engine (TRACE), launched in 2002, provides wide access to trade data for corporate bond transactions, including the price and size. Gira said that TRACE has been steadily expanded it to make trading in bonds less opaque. Investors now also have access to information about transactions in asset-backed securities, mortgage-backed securities, and Small Business Administration-backed securities in addition to corporate bonds.
On the equity side, Gira noted FINRA has also taken steps to increase market transparency of alternative trading systems, including dark pools. In June 2014, FINRA began publishing on its website volume and trade-count information for equity securities executed on an ATS. In April 2016, FINRA began posting the remaining, non-ATS OTC equity volume by member firm and security. And even more recently, FINRA began publishing monthly ATS block-size trading statistics in all National Market System stocks, Gira said.
Surveillance. FINRA is taking steps in its market surveillance program to prevent problems before they occur, Gira said. For example, FINRA has enhanced its ability to gather data across exchanges and alternative trading systems to see one virtual market instead of a disjointed patchwork of individual markets. Having this ability to review trading across markets, rather than at a single market at a time, is essential to any market surveillance program to hinder “bad actors” who try to “hide their fingerprints to avoid detection,” he added.
FINRA continues to refine existing patterns and develop new surveillance patterns to address new threat scenarios, Gira noted, and recently has launched a cross-market surveillance pattern to detect ramping at the open and close; a new surveillance pattern that looks for layering in the equity market to create favorable options prices; and is developing additional cross-market surveillance patterns to more closely monitor trading in ETPs. Gira believes that more needs to be done in this area so FINRA plans to introduce prototypes of a number of these surveillance patterns in the coming months.
FINRA’s board also recently approved rule proposals to expressly identify layering and spoofing as disruptive trading activity and to establish an expedited process for issuing cease-and-desist orders to prevent firms from engaging in the activity or providing access to a customer that engages in the activity, Gira reported.
Technology. FINRA continues to look for new ways to find and stop manipulative behavior and uncover manipulative schemes, Gira said. Specifically, FINRA is exploring data science tools, such as machine learning, that can be used in its surveillance development and ongoing parameter adjustment processes.
Machine learning can help the process of surveillance development, Gira said, “by having the surveillance analysts identify specific instances of behavior of interest and allow algorithms to ‘train’ themselves to identify additional instances in new data sets. This self-learning process would improve the efficiency of the process to determine appropriate parameters for the surveillance program.” FINRA is looking at a pilot to run a “self-adjusting” machine-learning version of an existing pattern to assess the benefits of such an approach to FINRA’s current automated surveillance program, Gira reported.