SEC Approval of FINRA-Proposed Rule Change to Amend Self-Trading Rules (Fed. Reg.)

The SEC approval of a FINRA-proposed rule to amend FINRA Rule 5210 ("Publication of Transactions and Quotations") to limit self-trading was published in the Federal Register. The rule change, among other things, would add Supplementary Material .02 to FINRA Rule 5210 to address members' obligations with respect to certain securities transactions that result from the unintentional interaction of orders originating from the same firm, known as "self-trades," that involve no change in the beneficial ownership of the security.

Furthermore, the rule amendments establish a distinction between two types of transactions in which the same person acts as both buyer and seller. The term "wash sales," which has long been used to describe these transactions is limited to situations where the buyer/seller has a bad intent, most commonly to manipulate price or to show false trading volume. A new term, "self-trade," is used to describe transactions where a person unknowingly acts as both buyer and seller due to the interaction between different trading algorithms, but without any ill intent. As to self-trades, the rule change requires FINRA members to have policies and procedures in place that are "reasonably designed" to review their trading activity for, and prevent, a pattern of self-trades originating from a single algorithm or trading desk, or from related algorithms or trading desks. According to the FINRA Rule, "Algorithms or trading strategies within the most discrete unit of an effective system of internal controls at a member firm are presumed to be related."

The new rule change also states that transactions resulting from orders that originate from unrelated algorithms or from separate and distinct trading strategies within the same firm would generally be considered bona fide self-trades, and thus not generally subject to disciplinary action. However, in the SEC order approving the rule amendment, the SEC noted that "FINRA reiterates its position that, although self-trades between unrelated trading desks or algorithms are generally bona fide, frequent self-trades may raise concerns that they are intentional or undertaken with manipulative or fraudulent intent." In short, firms should not become too comfortable that they will not be subject to disciplinary action if their trading algorithms result in a large volume of bona fide self-trades that could be limited by a reasonable improvement in procedures.

See:79 FR 26293.Related news: SEC Approves FINRA-Proposed Rule Regarding Self-Trades (with Lofchie Comment) (May 2, 2014); SEC Extends Review Period for FINRA Wash Sale Transactions Amendments (with Lofchie Comment) (March 3, 2014) FINRA Files Amendment to Proposed Rule Change Relating to Wash Sale Transaction, Self-Trades and FINRA Rule 5210 (December 4, 2013) FINRA Proposed Rule on Wash Sale Transactions (with Lofchie Comment) (August 16, 2013) MFA Comment Letter on Unintentional Wash Sales (September 26, 2013).