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New Rule Limits Self-Trading

Algorithmic trading—highly technical and advanced computerized financial trading of large amounts of securities—is here to stay.  What began as a tool for institutional investors has exploded in popularity in recent years.  According to a 2011 report from New York University, between 3,000 and 15,000 of these computerized orders are processed every day, totalling about 30 percent of the trading volume for U.S. equities markets.  Or, framed another way, algorithmic trading accounts for between $30 and $70 trillion per year in trading volume.

But, as with all new technologies, the rise of computerized financial trading has not been without its problems and setbacks.

Most infamously, perhaps, was the so-called “Flash Crash” of 2010.  On May 6, 2010, the Dow Jones Industrial Average plummeted by approximately 1,000 points—only to rebound shortly thereafter.  It was the largest crash in a single day in the history of the Dow.  And, among other systemic problems with the financial markets, when federal regulators released a report on the crash, they pointed to one single trade by a lone algorithm as the spark that set off the plunge.

Firms Must Act to Prevent Self-Trading

Another drawback to increasingly computerized financial markets has been the thorny problem of self-trading.

As defined by FINRA, self-trades are “[t]ransactions in a security resulting from the unintentional interaction of orders originating from the same firm that involve no change in the beneficial ownership of the security.”

Stated more simply, these are trades that, in a sense, a firm’s computer trades with itself.  At the end of the series of transactions, the same person or entity that owned the shares before owns them now.  FINRA had found that, for particular securities, this sort of “trading” could account for as much as 5 percent of trading volume on any particular day.  This activity, though, however harmless it seems (and even if it is not on purpose), distorts the market.  It can create the misimpression of interest or activity in a particular stock where there is none, or at least less.

FINRA, therefore, issued—and the SEC approved—Rule 5210, which places new limits on self-trading.  Now, FINRA members (which include over 4,000 securities firms and over 600,000 individual brokers) must have policies and procedures in place with the purpose of reviewing their trading activity for these types of trades.  The policies must be designed to prevent “a pattern or practice of self-trades resulting from orders originating from a single algorithm or trading desk, or from related algorithms or trading desks.”

Notably, both FINRA rules and federal securities laws already prohibit such trades where there is fraudulent or manipulative intent.  And the new rule does not technically apply to self-trades actually completed where there were such policies in place.

Still, this is hopefully yet another incremental step toward more stable modern markets.

If you are seeking information on FINRA rules, self-trading, or believe that you may have been the victim of securities fraud, please contact attorney Gregory Tendrich, P.A. today to hear how we can help.

 

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