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Regulators on Course to 'Harmonize' Rules for Trading Ahead
Traders Magazine Online News, June 12, 2009
The two principal self-regulatory bodies, in what could prove a boon for sellside trading departments, are on track to remake their trading ahead rules.
The Financial Industry Regulatory Authority and NYSE Regulation are working together to "harmonize" their rules governing the practice of brokers trading ahead or trading along with customer orders. If they reach agreement, FINRA's Manning Rules and the NYSE's Rule 92 will look very similar, easing brokers' compliance burden.
"We want to be as identical as possible so that there is one standard," Tom Gira, executive vice president in FINRA's Market Regulation Department, said at a recent conference.
Tom Gira
The differences in the two rules reflect the historic differences between the dealer market and the exchange market, John Malitzis, executive vice president for Market Surveillance at NYSE Regulation, told attendees at the same conference. "Given the current changes in market structure and the fact that business models have blended and harmonized, it makes sense for us to harmonize those rules."
NYSE Regulation has already made one change to Rule 92 to bring it more in line with Manning. In 2007, the regulator permitted members to exclude riskless principal trades from their obligations under the rule. The NASD had done so in 2002.
The move to harmonize the two rules is part of a master plan by the two regulators to eliminate as many duplications from their respective rulebooks as possible. The plan was the driving force behind the merger of the NASD with parts of NYSE Reg in 2007.
Earlier this year, both FINRA and NYSE Reg put out notices to their members asking for comment on the joint proposal. FINRA proposes to merge its two Manning Rules -- one for limit orders and one for market orders -- into a single rule, Rule 5320. NYSE Reg plans to merge its two Rule 92 rules -- one for the NYSE and one for NYSE Amex - into one. The comment period ended in April and now the two organizations are mulling their next step.
Perhaps the biggest benefit from any harmonization to accrue to broker-dealers will be a liberalization of the provisions of the NYSE's Rule 92 dealing with customer consent on institutional trades. Currently, under the rule, brokers must obtain order-by-order or blanket consent from customers before a broker can trade ahead of the customer's order. The industry has long complained that the provision is unnecessary and overly cumbersome. "It imposes unnecessary delays in the trading process," Ann Vlcek, associate general counsel of the Securities Industry & Financial Markets Association, told FINRA and NYSE Reg in a comment letter.
NYSE Reg has proposed adopting the disclosure provisions of the Manning Rules. That way brokers would only be required to inform their customers about their trading ahead practices on a periodic basis. The terms would be subject to negotiation, but brokers would not have to contact their customers every time they wanted to trade alongside their orders and request permission.
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