The Financial Industry Regulatory Authority has launched new, monthly “cross-market equities supervision report cards,” aimed at helping firms identify and halt potential manipulation, including spoofing and layering activity.
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. 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 new report cards are sent to firms where FINRA identifies potential spoofing or layering by the firm or entities to which the firm is providing market access. The reports provide a summary of the identified market activity, detailed information about the exceptions, and trends in such trading over the preceding six months. The report cards do not indicate that violations have occurred, only that potential problems that need to be reviewed.
"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," says Tom Gira, FINRA’s executive VP of market regulation. "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 we can complete a formal investigation."
The report cards, the first in a planned series focusing on cross-market manipulation, are intended as a preventive compliance measure that will operate in parallel with FINRA's own surveillance process. FINRA will continue its current practice of investigating suspected manipulation and, where appropriate, taking enforcement action or referring the activity to the Securities and Exchange Commission if the market participants in question fall outside its jurisdiction.