The U.S. Financial Industry Regulatory Authority (FINRA) on Thursday made available to member firms its first monthly cross-market equities supervision report cards, aimed at helping firms identify and halt “spoofing” and “layering” activity.
The reports, which aim to help firms identify and halt manipulative trading strategies, provide a summary of the market activity in question, detailed information about the exceptions, and trends in this sort of trading over the preceding six months.
Layering refers to entering limit orders with the intended effect of moving the market to obtain a beneficial execution on the other side of the market, the FINRA announcement explains.
Spoofing refers to entering orders to entice other participants to join on the same side of the market at a price at which they would not ordinarily trade, and then trading against the other market participants’ orders.
The report cards do not reflect conclusions that violations have occurred, they indicate potential problems that need to be reviewed, FINRA says.
The regulator sees the reports as a “preventive compliance measure” that will operate in alongside FINRA’s own surveillance efforts, says Tom Gira, executive VP of market regulation at FINRA.
“Most firms attempt to surveil and review for manipulation, but bad actors look to mask their activity by trading across multiple markets or firms, which for any individual firm may be hard to detect,” adds Gira.
“We are leveraging our cross-market data and employing sophisticated automated surveillance technology to flag suspicious trading patterns so that firms can add that data to their own surveillance and supervisory processes and take appropriate action to address the activity even before FINRA can complete a formal investigation.”
The new report cards are the first in a planned series of initiatives focusing on cross-market manipulation, FINRA says.
“FINRA is marshaling its ability to look across trading at different firms and markets to bring that information to bear in the fight against layering and spoofing,” explains Richard Ketchum, chairman and CEO of FINRA.
“These types of manipulation take advantage of other investors and harm public confidence in market integrity. We expect that the firms will use the data to enhance their own surveillance and move swiftly to cut off potential market manipulation.”