FINRA announces several initiatives aimed at Dark and HFT trading September 26, 2014
Like us at the KOR Group, many in the industry were awaiting the outcome of FINRA’s rulemaking initiatives following the September 19th meeting where the FINRA board considered a swath of rule proposals seeking to heighten the oversight of off-exchange and HFT trading and transparency. As expected, the FINRA board approved the several items specific to the equity markets, but what do they mean for the industry? Let’s have a closer look:
Expansion of ATS Transparency – FINRA seeks to further expand the ATS transparency initiative and will be proposing a requirement to require reporting of non-ATS OTC trades or internalized trades by the internalizing firm through their market participant identification (MPID). Additionally, FINRA will be rolling out quarterly volume reporting, fee free in a machine readable format which is a welcome addition as FINRA currently charges as much as $18,000 per year for the data.
Supervision of Algorithmic Trading Strategies – FINRA plans additional guidance surrounding effective controls and practices to monitor for and prevent potential adverse impacts to the market, but Firms are already subject to oversight and supervision through FINRA Rule 3130 which requires member firms to have a supervisory control process and annual certification of compliance by the firms CEO. Will added guidance improve market stability? Highly unlikely as today firms covet their proprietary strategies and take great care with the implementation of these strategies in the market as doing otherwise generally comes at great cost. Guidance is good; let’s hope FINRA’s guidance does not become an administrative burden and turns into a device for issuing fines rather than to promote best practices.
Clock Synchronization– Currently, firms are required to synchronize their computer systems for drift to a 1-second standard, which presents significant issues for regulators attempting to perform advanced surveillance, participants trying to make sense of data with uncorrelated timestamps, and participants and third-party firms attempting to measure execution quality. This is compounded by the fact that many firms still are coding to a 1-second interval when reporting to FINRA, though they are most likely not doing so internally. FINRA’s proposal will seek to reduce the current allowable drift to 50-200 milliseconds. KOR’s opinion on clock synchronization is strong and has been consistently publicly stated. FINRA’s change here seems like little more than lip service.
Nearly every firm in the industry uses the NTP protocol to synchronize their clocks, which achieves an accuracy measured in tens of milliseconds over the public internet and 1-2 milliseconds over a LAN or in a datacenter – FINRA’s stipulation here will have no effect on the broad majority of the industry. We believe they are doing this with that understanding in mind, in order to claim they are making progress while doing nothing substantive in reality.
For firms that must synchronize clocks over the public internet, KOR believes a 10-20ms drift is reasonable, and achievable with absolutely no additional cost or configuration. For any firm with servers co-located in a datacenter, the standard should be 1-2ms. Exchanges and SROs should be required to use specialized hardware to synchronize their clocks to 1us (microsecond). Either FINRA is so far behind the times that it is unaware of current clock synchronization capabilities and accuracy or it is deliberately doing as little as possible.
Registration of Associated Persons Involved in the Preparation of Algorithmic Strategies – FINRA will seek to require registration of individuals wo are primarily responsible for the design, development or for directing modifications of an algorithmic strategy or have responsibilities for supervising such functions. Registration is not a significant cost burden and doing so aids regulators in better understanding the firm personnel involved in running trading operations as the industry evolves.
These are a few of the bigger steps which FINRA plans to undertake over the coming months as they crack down on ATS and HFT trading. The expansion of ATS transparency is a fantastic step in the right direction and we applaud them for that. KOR urges FINRA to continue down this path, and to require quote consolidators to start reporting trade location for any trades being printed to a trade reporting facility. We also believe that transparency around Form ATS and additional details around order types, fee structures, participants and segmentation should be made available for all ATSs.