Regulators are looking to increase transparency into fixed income ATSs and to raise supervision of firms that sponsor algorithms.
In an interview at the Securities Industry Financial Markets Association conference in New York yesterday, the head of Finra said the regulatory body would focus a lot on fixed income markets in 2015.
“The range in use of pre-trade transparency in terms of RFQs and ATS systems and the rest, raise real questions about what the transparency should be to investors,” said Richard Ketchum, chairman and chief executive of Finra. And also for firms: How are they using RFQ (request for quote) systems for best execution decisions?
With RFQ systems, firms can query one or more brokers for a quote.
Ketchum suggested that firms that offer RFQ systems should think about whom they are allowing to participate. Finra has a proposal out to look at the markup that broker dealers impose on same-day trades. “What is of concern is that there are 2 ½ percent markups on trades that have been held on hour or less,” he said. Finra has authorized a proposal coming out shortly with regard to the price of a security when it is bought and sold as a same-day trade. Some trades are on hold as short as 15 minutes. Now that Finra has the Trade Reporting and Compliance Engine (TRACE), it has much more information on pre-trade transparency, and it knows that the majority of the trading occurs in the same day.
“The substantial majority of same-day activity usually occurs in the same hour or the same 15 minutes,” he noted. All broker dealers that are Finra members are required to report over-the-counter secondary market transactions in corporate bonds to TRACE. Ketchum said that firms charge narrower markups in those circumstances than when they sell out of true inventory. It’s not illegal, but he said when there are significant markups in what firms are charging it argues for pre-transparency. Finra’s proposal is for disclosure to customers on the price of the security that was bought and sold at and when it was a same-day trade.
Finra has other proposals related to how much information the regulator gets from fixed-income ATSs, that will help it judge how that market keeps changing, but Ketchum didn’t offer details.
Raising the bar for algo sponsors
Shifting to US equity market structure, Ketchum is looking at registering the supervisory responsibility with respect to sponsoring algorithms in the market.
“The equity markets have become substantially more complex,” he said, noting that “regulation has encouraged competition, and technology has driven larger fragmentation and enormous amounts of high speed trading.”
Finra’s focus as a regulator is on a small percentage of the high-speed trading, which is the manipulative and abusive activity. “We see the same violators moving from firm to firm,” said Ketchum. To increase surveillance, Finra wants to require registration for those who are primarily involved with designing algorithms -- “not everybody. These are people who need to understand compliance and market responsibility to operate.” The other items are increasing trade synchronization, knocking out trades that are more than two seconds long and having them treated as late sales, “so that they don't create appearance that the market is bouncing around.”
With respect to equity ATSs, Finra is moving to expand ATS trade reporting rules to all activity occurring away from the exchanges so that Finra can publish that information and let people know where their transactions are being executed. This would expand the rules to broker-sponsored ATSs. “Let’s face it, most retail transactions today are being executed at a member firm and not on an exchange,” said Ketchum.Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio