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Digital Subscriptions > The Hedge Fund Journal > Issue 113 - April | May 2016 > New FINRA Registration Requirement for Algo Traders

New FINRA Registration Requirement for Algo Traders

Implications for broker dealers and investment advisers

On 7 April 2016, the Securities and Exchange Commission approved the Financial Industry Regulatory Authority’s proposed amendments1 to NASD rule 1032 (Categories of Representative Registration).2 These amendments will require FINRA members to register associated persons who are primarily responsible for the design, development or significant modification of ‘algorithmic trading strategies’ (or for the day-today supervision or direction of such activities) as ‘Securities Traders'.


The increasing automation of the securities (and futures) markets, and a number of high-profile market disruptions linked to automated trading and clearing systems3 have all coalesced into a series of SEC,4 CFTC,5 and self-regulatory organisation initiatives to regulate and control the use of systematic and algorithmic trading systems. FINRA’s proposal to require the registration of algorithmic trading personnel is just one specific manifestation of this broader regulatory initiative.

Historically, associated persons of FINRA members who are involved solely in the design, development or significant modification of ‘algorithmic trading strategies’ have not been subject to FINRA’s registration requirements. As a result of the lack of any individual licensing obligation, these algorithmic trading personnel: (1) have not been required to pass any examinations; (2) have not been subject to continuing education requirements; and (3) have — in many ways — been ‘under the radar’ when it came to FINRA’s examination and inspection program.

FINRA now believes that requiring the registration of certain algorithmic trading personnel could help reduce or prevent problematic conduct caused by the widespread use of algorithmic trading strategies. In February 2016, FINRA proposed a new rule that would require the registration (as Securities Traders6) of “associated persons that possess knowledge of, and responsibility for, both the design of the intended trading strategy (e.g., the arbitrage strategy) and the technological implementation of such strategy (e.g., coding)” and to make those associated persons subject to FINRA’s continuing education requirements applicable to Securities Traders.7

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