Finra Identifies HFT, Algo Integrity as Regulatory Priorities

The regulator's focus is on the testing of algorithmic trading systems and their functional integrity, particularly with regards to compliance with the Market Access Rule, and in light of various algorithmic 'glitches' over the past few years. It says that it will instigate targeted investigations where necessary, and that firms must be prepared to show documented proof of testing when required.

In addition to algorithmic trading systems, the regulator also highlighted HFT as a potential area of concern regaridng potential market abuse.

"Although many HFT strategies are legitimate, some are not and may be used for manipulative purposes," Finra says. "Given the scale of the potential impact these practices may have, the surveillance of abusive algorithms remains a high priority for Finra. Finra reminds firms using HFT strategies and other trading algorithms of their obligation to be vigilant when testing these strategies pre- and post-launch to ensure that the strategies do not result in abusive trading."

Specifically, it said that it was concerned about momentum ignition strategies, which include layering and spoofing. Going further, the regulator also said that it would be looking at firms utilizing HFT and algorithmic strategies from outside of the US, and reminded firms providing access to US markets of their obligations to ensure that flow running through their access was not abusive.

Finra's other regulatory priorities can be found in the letter, here.