FINRA has amended Rule 5210 to require member firms to adopt policies and procedures to detect and prevent patterns or practices of self-trades. While the amendment recognizes that unintentional self-trades are generally bona fide transactions, amended Rule 5210 will require members to have policies and procedures in place that are reasonably designed to review their trading activity for, and prevent, a pattern or practice of self-trades resulting from a single algorithm or trading desk, or related algorithms or trading desks. FINRA noted that the amendment is primarily designed to address instances where self-trades account for a significant percent of volume in a security, which could affect price discovery.
In response to the original proposed rule, some commentators urged FINRA to adopt a rule more similar to the prohibition on wash trades recently set forth by the CME Group in its Advisory Notice concerning CME Rule 534. Unlike the FINRA rule, CME Rule 534 requires that the party intended to achieve a wash result. In response, FINRA noted that although self-trades between unrelated trading desks or algorithms are usually bona fide, frequent self-trades may raise concerns that they are intentional or undertaken with manipulative or fraudulent intent. FINRA also differentiated its goals from those of CME Group insofar as the amendment is meant to address unintentional self-trading activity, and not the regulation of wash trades. FINRA also noted that, unlike the CME Advisory, FINRA’s proposal, “imposes specific additional obligations on firms that engage in algorithmic activity or use multiple algorithms or trading desks as part of their trading activity. Amended Rule 5210 will become effective on August 25, 2014.