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Should FINRA make brokers audit customer quant algorithms to ensure they comply with the markets?

(Last Updated On: October 21, 2010)

Should FINRA make brokers audit customer quant algorithms to ensure they comply with the markets?

Brokers should also engage in an auditing of algorithms to ensure they operate the way they’re supposed to work, he said

“Broker-dealers have a responsibility to supervise activity that goes through them,” whether orders come over the phone or via algorithms, Ketchum told reporters at the conference. Finra oversees almost 4,700 U.S. brokers. “If they’re not asking questions regarding how the algos work in exceptional conditions, we’d have questions about how they’re doing their supervision.”

A lesson of May 6 is that brokers and securities industry professionals could see how “volume operated under pressure,” Ketchum said.

Discount brokers with retail investors, mutual funds and others that trade away from exchanges must weigh decisions they make at times when a third of equities volume is “likely to be redirected” from their usual execution venues to exchanges, he said.

“People have different views” about the supervision they’re required to do, Ketchum said. “That’s what makes a regulated environment.”

http://www.businessweek.com/news/2010-10-19/brokers-should-audit-customer-algorithms-finra-says.html

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