Ketchum Calls FINRA Oversight of NYSE Venues “Major Step”
May 20, 2010
The assumption by the Financial Industry Regulatory Authority of market regulation for NYSE Euronext's U.S. trading venues is a major step toward establishing market oversight and protecting investors, according to Rick Ketchum, chairman and CEO of FINRA.
Under the plan, announced May 4, FINRA—which already conducts market surveillance for the NASDAQ Stock Market and trading occurring off-exchange—will be responsible for aggregating and regulating approximately 80 percent of trades in equities made at U.S. market centers.
Speaking at a May 20 Senate subcommittee hearing examining the causes and lessons of the May 6 market plunge, Ketchum said that the benefits of the move for market integrity and investor protection are “profound.”
But even more importantly, he said, “empowering a single set of eyes to oversee the majority of transactions will facilitate the necessary progress toward a truly holistic approach to regulation that addresses the realities of today's marketplace.”
Ketchum also said that technological advances in trading systems, coupled with market fragmentation, have led to a situation where comprehensive inter-market surveillance is essential to ensuring the overall integrity of the equity markets.
“The major hurdles of just a few years ago to consolidated market surveillance have been significantly reduced due to the progression of market structure and the convergence of many aspects of exchanges' business models,” he said. “With the changes to market structure resulting from Regulation NMS [National Market System] and virtually all aspects of trading becoming electronic, the previous distinctions between market types are quickly fading away, minimizing many of the prior obstacles to consolidated audit trail data and oversight.”
Since the adoption of Reg NMS in 2005, there has been a significant increase in market linkages, the result of which is that trading activity that originates on one market often has a profound effect on other markets, her explained: “This, of course, creates a much greater possibility of cross-exchange market manipulation where, for example, trading on one market is used to artificially affect a security's price and trading on another market is used to take advantage of that price change.”
A similar problem exists when surveilling for compliance with rules that prohibit firms from trading ahead of a customer order, such as limit order protection rules and front running rules. In these cases, the proprietary trading may be executed on one market while the customer trade is executed on another, he said, adding that these problems are exacerbated by the fact that some firms trade using multiple market participant identifiers (MPIDs) or trade pursuant to market access arrangements whereby the firm's trading is identified with an MPID assigned to a different firm.
“FINRA believes there should be consistent and uniform gathering of order, trade and quote information across all equity and options markets, and that the audit trail must be sufficiently granular to enable regulators to readily identify trading activity by market participants across markets,” he said.
While a consolidated audit trail would not eliminate all the challenges of analyzing the data from a 66 million trade day like on May 6, “it would make the process significantly more efficient and effective,” he said.
