Algorithmic Trading Strategies and Securities Traders

April 19, 2016

On April 7, 2016, the U.S. Securities and Exchange Commission (“SEC”) approved the Financial Industry Regulatory Authority (“FINRA”) amendment to National Association of Securities Dealers (“NASD”) Rule 1032 (Categories of Representative Registration). The amendment requires associated persons responsible for the design, development, or significant modification of algorithmic trading strategies to register as Securities Traders.

Under NASD Rule 1032(f), a registered representative must register with FINRA as a Securities Trader if such person is engaged in:

  • proprietary trading;
  • the execution of transactions on an agency basis; or
  • the direct supervision of such activities with respect or transactions in equity, preferred or convertible debt securities effected other than on a securities exchange.

NASD Rule 1032(f) will now include associated persons engaged in an “algorithmic trading strategy” related to the activities noted above. The change defines an algorithmic trading strategy as “an automated system that generates or routes orders (or order-related messages), but shall not include an automated system that solely routes orders received in their entirety to a market center.”

FINRA’s examples of such strategies include:

  • an arbitrage strategy (such as index or exchange-traded fund arbitrage);
  • an automated hedging or loss-limit algorithmic strategy that generates orders;
  • a trading strategy that generates orders based on moving reference prices; and
  • an order generation, routing, and execution program used to reduce potential market impact by dividing large orders into smaller ones.

The amendment requires all associated persons to complete the Series 57 qualification examination if they are:

  • primarily responsible for the design, development or significant modification of an algorithmic trading strategy relating to equity (including options), or preferred or convertible debt securities; or
  • responsible for the day-to-day supervision or direction of such activities.

FINRA will announce the effective date of the rule change no later than 60 days from April 7, 2016. The amendment will take effect no sooner than 180 days and no later than 300 days from April 7, 2016.