Wall Street Regulator: Suspicious Trade Complaints 'Spiked' This Year
A Wall Street regulator said industry complaints about market manipulation and trade reporting have spiked this year, raising questions about the adequacy of banks' internal controls over their traders.
Gene DeMaio, of Financial Industry Regulatory Authority (FINRA), said on Wednesday that his group is still investigating these complaints.
On Thursday, UBS AG said a rogue trader, who was later charged in London with fraud, will cost it $2 billion in the third quarter. The loss highlights the extent to which some banks still cannot police their traders.
FINRA has received complaints this year about banks' audit systems, canceled orders, and brokers misrepresenting whether orders were on behalf of customers, DeMaio said.
"These are areas that for a long time we were not receiving complaints in, and all of a sudden this past year it's really spiked up," DeMaio, senior vice president in FINRA's market regulation unit, told a FIA options industry conference.
"We've been getting a lot of complaints about ... manipulation -- the possibility that somebody is manipulating equity to advantage their option position," he said.
The UBS rogue trading case could intensify pressure on regulators to ferret out wrongdoing. In the United States, it will also put more pressure on rulemakers to craft tough regulations as they implement the Volcker rule, a part of the 2010 Dodd Frank financial oversight law that limits banks from betting their own money in financial markets.
FINRA has made stopping manipulation a priority the last couple of years. The regulator, funded by the financial services industry, monitors trading and reports to the U.S. Securities and Exchange Commission.
"We're seeing a large number of order misrepresentations, we're seeing problems with our audit trail," DeMaio said, adding some brokerages have identified orders as customer orders when in fact they originated from the firm itself.
FINRA has asked firms if they have seen some of the problems internally, and whether they've taken steps to address them, DeMaio added.
Underlining the complexity of policing financial markets, FINRA and the SEC this year took the unprecedented step of asking banks, hedge funds and other high-frequency traders for their algorithmic codes, in order to better understand their trading strategies.
BONA FIDE MARKET-MAKER
At the FIA conference, DeMaio helped clarify what regulators consider to be "market making," a key question as the SEC comes up with new obligations for high-frequency traders, and as regulations are crafted for the Volcker rule.
DeMaio offered a broad definition of market making, and stressed the need for such firms to consistently provide tradeable quotes, adding, "we try to err on the side of saying somebody is a bona fide market maker."
Market makers buy and sell securities and other instruments from customers. Many dealers fear that the Volcker rule will prevent them from performing market making duties beyond what is specifically tied to customer needs.
Exchanges have varying definitions for market making, adding to confusion about which activities will be allowed under the rule. DeMaio's comments could indicate U.S. regulators are considering a loose definition of market making, which may be good for banks, though it is too early to tell.
DeMaio said FINRA looks for consistent quoting activity on both sides of the market -- not just "speculative short selling" -- and at how close the quotes are to the current stock price, when it decides whether a firm is a bona fide market maker.
A broad definition may also bring more high-frequency trading firms under new rules the SEC is considering for market makers. The agency has said it may add obligations and privileges to such firms to ensure they continue to trade in market crises like last year's "flash crash."
"What we don't want to do is take the stance that somebody is not a bona fide market maker when they are really trying to get liquidity into the market," FINRA's DeMaio said. "That's really what we're looking to see: did you add liquidity?"
(Reporting by Jonathan Spicer; additional reporting by Ann Saphir in Chicago; Editing by Tim Dobbyn)
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