[ by Howard Haykin ]

It is time for firms to gird themselves for the next FINRA Sweep Examination, that will target alternative trading systems, or ATS's.   FINRA is about to pay visits to a wide range of ATS's, in an effort to ensure they are properly handling customers' orders - as reported by Traders Magazine's Tom Steinert-Threlkeld.  FINRA considers ATS operations a top priority in 2013, according to John Malitzis, EVP of Market Regulation.

Who Might Be Examined?    

SRO examiners will initially sweep about 15 systems, that typically are designed to help match buyers and sellers of large quantities of stocks - all within a relatively anonymous environment such as ITG's Posit, Goldman Sachs' Sigma X, and other 'crossing networks'. 

FINRA's Interest in ATS's and Possible Exam Coverages.  

FINRA is concerned about dark pools principally because they accounted for over 13% of all equities trading in 2012 - that according to Rosenblatt Securities.  In January alone, 2.4 billion shares of stock were traded away from exchanges, accounting for nearly 37% of all equity trading - that according to NYSE Euronext.

Areas of Interest?

FINRA's John Malitzis provided the following scope and areas that examiners will likely concentrate on:

• Indications of interest, whether the firm trades as principal or riskless principal within the ATS, and whether and how this is disclosed to ATS subscribers.
• Method by which the ATS generates compensation, how customer errors are handled, and whether and how affiliates of the ATS interact with order flow
• How the systems handle errors, how confidential information on customers' orders get handled and whether any interaction occurs between an ATS and any affiliated organizations.

FINRA supplied other tibits of information about the sweep:

• FINRA has not said which specific routing or disclosure practices at ATSs will be examined. But it plans to look at how orders are routed, how order types are disclosed and how confidential customer order information is protected,
• FINRA does not disclose which dark pools or trading systems will be included in a sweep, which will be conducted as part of the operations of its Trading and Market Making Examination Program (TMMS).
• The risk criteria, in FINRA's ongoing "cycle" program of examinations, can include the volume of trading on a given system, any complaints received and the system's disciplinary history.

For further details, go to:   [ Traders Magazine Online, 2/13/13 ].