FINRA and Trade Data Oversight

FINRA handles more data on market events in a single day than MasterCard processes in a year. Surveillance on that enormous scale (many tens of billions) has been made possible by (and is necessary due to) Reg NMS, which granted wide latitude to market participants to determine a market structure that adhered to certain requirements. Speaking at a conference on Wednesday, FINRA Executive Vice President of Market Regulation Thomas Gira posed two questions: did the SEC give participants too much leeway, and, as a result, are markets now out of control?

For more background on Reg NMS and the changes that have occurred to market structure since its implementation, please see our White Paper here. The debate about what constitutes beneficial market activity versus non-beneficial market activity is a highly relevant one. We blogged last week about the first criminal conviction in a spoofing case and the implications for those facing civil cases related to that type of market activity. It is in that context that Mr. Gira provided his thoughts to the conference, which was on the topic of financial markets.

He concluded that, while "Investors now benefit from lower trading costs, tighter spreads, timely executions at firm quotes, a wider variety of order types to achieve their investment objectives, and the availability of multiple, innovative trading platforms," the cost may be "a more complex, fragmented market, with liquidity dispersed among many trading venues." This creates problems for regulators, who need very detailed and specific information about market activity in order to draw a fine line between legitimate and illegitimate trade orders (i.e. spoofing).

His remarks are interesting throughout, but the real heart of his comments emphasizes the need to allow regulators a comprehensive view of market activity in order for them to conduct surveillance effectively. FINRA currently is "...able to put the pieces of the puzzle together for 99 percent of the listed equity market and 65 percent of the listed options market," but as valuable as that has been, "...implementation of the SEC’s proposed Consolidated Audit Trail, or CAT, will take surveillance to the next level." We've blogged about the CAT project before, the scope of which will allow regulators to stay nimble and "to focus on maximizing intended consequences and minimizing unintended consequences" caused by the change in market structure that Reg NMS brought with it.

Gira also discussed FINRA's pilot program (currently working with five companies) to help spot spoofing activity by looking at customer behavior. This has been an interesting addition to FINRA's Equity Report Card system, since most recent allegations related to spoofing have all involved activity in futures markets, which FINRA does not regulate. Issues related to market oversight are certainly becoming more complex, and, in Gira's words, will require "...a smart, strong, adaptable regulatory framework..." It is clear that all regulators are now taking a serious look at how they can make markets as fair and efficient as possible for investors.