Banking, finance, and taxes

FINRA's First Report Cards on Spoofing and Layering

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FINRA, the Financial Industry Regulatory Authority, has issued its first cross-market report cards covering the acts of spoofing and layering orders. These are common complaints about high frequency trading and against those who are involved in making markets. FINRA’s aim is to help firms identify and halt spoofing and layering around trading activity.

Spoofing is where orders are entered to pull in trades on the same side of the market at a price they would not ordinarily trade at – and then trading against other market participants’ orders. Layering is one manipulation tool around entering limit orders which are meant to move the market in a manner which garners a beneficial execution on the other side of the market.

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. FINRA did specify that these report cards do not reflect conclusions that actual violations have occurred, but they are aimed at indicating potential problems that need to be reviewed. The reports provide the following:

  • a summary of the identified market activity,
  • detailed information about the exceptions,
  • and trends in such trading over the preceding six months.

It is also noted that this was the first set of a planned series focusing on cross-market manipulation. It will join other reports covering trade reporting, best execution, audit trail reporting and Regulation NMS compliance.

FINRA Chairman and CEO Richard Ketchum said:

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. 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.

Tom Gira, Executive VP of Market Regulation, said that these reports are a preventive compliance measure that will operate in parallel with FINRA’s own surveillance process. The group will also continue monitoring and investigating suspected manipulation. His quote formally said:

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. 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.

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