by Howard Haykin

BEST EXECUTION.    When assessing whether a firm uses reasonable diligence to assure that their customer order flow is directed to the best market - given the size and types of transactions, the terms and conditions of orders and other factors - FINRA will …

• review a firm’s Best Ex decision-making where the firm routed all or substantially all customer orders to a small number of wholesale market makers from which they received payment for order flow or an affiliated broker-dealer or an alternative trading system (ATS) in which the firm had a financial interest.
• assess how a firm checks additional venues for potential price improvement.
• review how a firm quantifies the benefits to customers from its receipt of order routing inducements and how it manages the conflict of interest between their duty of Best Ex and any inducements or benefits they receive from the routing or internalization of customer orders.

MARKET MANIPULATION.    FINRA monitors market manipulation by enhancing its surveillance capabilities and providing firms with tools they can use to identify possible manipulative activities. In 2009, FINRA will focus on manipulative trading in correlated Exchange Traded Products or ETPs, including those that track common, broad market indices. FINRA uses pattern exploration to better identify the exploitation of the unique characteristics of ETPs, such as the creation and redemption process and composition changes to the ETP portfolios, and expanding the use of machine learning to improve its ability to react to changes in the ETP market. Similarly, FINRA will focus on reviews for potential manipulation across correlated options products (e.g., options on broad market indices and options on ETFs overlying the same indices).

FINRA will continue to help firms with their compliance efforts by providing Cross Market Supervision Report Cards, which help firms identify potential manipulation across multiple firms, markets and products and proactively address related compliance risks.

MARKET ACCESS.    FINRA will continue to review firms’ compliance with Rule 15c3-5 (the Market Access Rule) under the Securities Exchange Act of 1934, focusing on how firms: (i) apply appropriate controls and limits to sponsored access orders; (ii) retain sole authority to determine the boundaries for those controls and limits; (iii) test the effectiveness of those controls and limits; and, (iv) implement and test exception reporting systems covering sponsored access orders. FINRA will also assess how firms monitor their customers’ activity and maintain pols and procedures, as well as technical controls, to detect and prevent potentially manipulative or other prohibited trading activity.

SHORT SALES.    FINRA will review whether firms have structured their aggregation units in a manner that is consistent with the requirements of Exchange Act Rule 200(f) and can demonstrate the independence of the units through measures such as separate management structures, location, business purpose, and profit and loss treatment.

SHORT TENDERS.    As in 2018, FINRA will review how firms account for their options positions when tendering shares in the offer. Exchange Act Rule 14e-4 provides that if, following the announcement of a tender offer, a market participant sells call options with a strike price less than the tender offer price, the firm must reduce its long position by the shares underlying the options for purposes of calculating its net long position. FINRA will continue to educate firms about these requirements and evaluate their compliance with them.