Effective December 15, 2016, a revision of FINRA Rule 5210 (Publication of Transactions and Quotations) goes into effect, further defining prohibited actions related to disruptive quoting and trading. 

FINRA Rule 5210 was designed to prevent the manipulative or fraudulent publication of any quotation or execution of trades unless the member firm believes the quote or transactions represents a bona fide bid for, or offer of, such security.  The term “quotation” includes any bid or offer, or any formula, such as “bid wanted or “offer wanted,” designed to induce any person to submit a bid or offer.

This rule further defines the following:

Manipulative and Deceptive Quotations

Firms may not publish any securities transactions that are fraudulent, deceptive, or manipulative securities; firms must know or have reason to believe that published securities transactions are bona fide.

Self-Trades

Self-trades are trades that unintentionally interact with orders from the same firm, and involve no change in the beneficial ownership of the security — for instance, if both sides of the trade (the purchase and the sale) are from and to the same market maker’s principal account.  If the transaction is unintentional, it is considered a bona fide transaction.  However, firms must have procedures in place to detect and prevent a pattern or practice of self-trades resulting from orders originating from a single or related algorithm or trading desk.

Disruptive Quoting and Trading Activity Prohibited (Effective 12/15/16)

The two types of prohibited quoting and trading activity are:

  • Type 1 — a frequent pattern of activity where:
    • A party enters or displays multiple limit orders on one side of the market at various price levels; and
    • The level of supply and demand for the security changes; and
    • The party enters another order on the opposite side of the market that is subsequently executed; then
    • Cancels the other orders.

Entering multiple limit orders that are not bona fide may create the false appearance of supply or demand (depth-of-book), and induce others to effect transactions they might not otherwise make.  The orders entered based on the non-bona fide limit orders could then move the market price to the benefit of the party entering the non-bona fide orders, who would then effect a profitable bona fide order, and cancel the non-bona fide orders.

  • Type 2 — a frequent pattern of activity where:
    • A party enters an order inside the National Best Bid and Offer (NBBO), which narrows the inside market; then
    • Executes an order on the opposite side of the market against another market participant who joined the new inside market established by the original party described in Step 1.

How can I educate my representatives and supervisory team about this?

To maintain the most current educational materials in the industry, FIRE Solutions has updated the following Firm Element and exam prep courses to include this new rule change:

  • Conflicts of Interest
  • Conflicts of Interest Multifunctional firms
  • Fair Pricing and Compensation
  • Fraud Prevention and Detection
  • General Securities Supervision
  • Institutional Trading
  • Market Conduct
  • Market Making Rules
  • Riskless Principal and Mixed Capacity Trading
  • Supervision and Surveillance
  • Trade Reporting Equities
  • Trading Equities I
  • Trading Equities 2