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FINRA Seeks Quicker Process on Disruptive Quoting

The US Financial
Industry Review Authority (FINRA) has filed a notice with the Securities and
Exchange Commission that will enable it to clamp down on what it considers
“disruptive quoting and trading activity” much quicker than is currently
possible.

In the
filing FINRA notes that taking action against an alleged miscreant can take
“several years” before it is concluded, but it points out that there are, “…certain
clear cases of disruptive and manipulative behaviour
or cases where the
potential harm to investors is so large, that FINRA should have the authority
to initiate an expedited proceeding to stop the behaviour from continuing”.

The target of the proposed rule change is spoofing or
layering in markets, where a participant deliberately places large orders with
no intention to deal while hoping to force the market in the other direction
into their own smaller resting orders. If successful the process is reversed.

In the past year two high profile cases of spoofing have
been processed with Panther Energy principal Michael Coscia receiving
a jail sentence for spoofing
futures in commodity and foreign exchange
markets and UK-based trader Navinder Singh Sarao being
extradited and pleading guilty
to spoofing US futures markets.

Without mentioning these two cases, FINRA says in its notice
that the relevant exchanges and FINRA were able to identify recent instances of
disruptive quoting and trading activity in real-time or near real-time;
however, due to the procedural requirements in existing rules, the members
responsible for the conduct or responsible for their customers’ conduct were
able to continue the disruptive quoting and trading activity during the
entirety of the subsequent lengthy investigation and enforcement process.

“FINRA believes that it should have the authority to
initiate an expedited proceeding to stop the behaviour from continuing if a
member is engaging in or facilitating certain clear types of disruptive quoting
and trading activity and the member has received sufficient notice with an
opportunity to respond, but such activity has not ceased,” it states.

In two rule change proposals, FINRA seeks to explicitly
outline activity that is banned to close a loophole that it says exists whereby
multiple firms or accounts can be engaged in bad practice, as well as to allow
it to issue “cease and desist” orders to halt the activity while a full investigation
and potential hearing takes place.

Colin_lambert@profit-loss.com

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@Profit_and_Loss

Colin Lambert

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