Securities Litigation

FINRA recently issued Regulatory Notice 15-06 requesting comments on the proposal that would require the registration of associated persons involved in the design, development or modification of algorithmic trading strategies. As automation continues to evolve, firms are relying more on automated systems to trade securities. With the use of pre-programmed trading instructions, or algorithmic trading strategies, firms can input various variables in order to achieve the required trading activity. If an individual, as opposed to an automated system, performed the trade, that associated person is required to register with FINRA as an equity trader. FINRA has become concerned that the associated person responsible for the design, development or modification of the algorithmic trading strategy used by a firm may lack knowledge of the securities rules and regulations applicable to FINRA members, which may lead to algorithms that do not comply with the rules. Other concerning conduct includes failure to check orders for accuracy, failure to properly mark orders or having inadequate risk management controls. These concerns could be eliminated if the associated person responsible for the algorithmic trading strategy is required to meet the same standards that apply to individual traders. The requirement would not apply to every associated person that is involved in the strategy. Rather, firms should analyze the strategy and the individuals involved to determine who is primarily responsible for the design, development or modification (or for supervising or directing such activities). The goal is to require firms to identify the key individuals who would be able to evaluate whether the strategy is compliant with the regulations. In addition, firms should include a section in their supervisory procedures that addresses the algorithmic trading strategies and, in particular, procedures to monitor compliance with securities laws.