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SEC Rules. Prop Trading Firms Obliged to join FINRA

The TRADE > News > Regions > Americas > Majority of prop trading firms obliged to join FINRA under expanded SEC rule

AMERICAS, REGULATIONAugust 24, 2023 1:53 PM GMT

Majority of prop trading firms obliged to join FINRA under expanded SEC rule

Potentially dozens of broker-dealers are set to be affected by the ruling; market opinion divided on decision.


The Securities and Exchange Commission (SEC) has moved to expand the remit of national securities associations such as the Financial Industry Regulatory Authority (FINRA) to cover previously exempt proprietary trading firms. The move to increase the number of broker dealer firms registering with FINRA comes as the commission aims to promote fair, orderly, and more efficient markets. The decision is set to contribute to greater transparency and strengthened oversight in the treasury markets due in large part to the fact that FINRA requires members report post-trade activity in these markets. “Under current rules, proprietary trading firms which are solely members of an exchange are subject to less rigorous oversight and operate in a less transparent manner than firms that are current FINRA members and that are required to report their Treasury trades,” explained commissioner Jaime Lizárraga. ”Today’s [23 August] amendments remedy this lack of transparency by levelling the playing field between current FINRA members that report their Treasury trades and non-FINRA members that aren’t required to.” Previously some firms were able to engage in unlimited proprietary trading of securities off-member-exchange without FINRA oversight – at the time this related to National Association of Securities Dealers (NASD), FINRA’s predecessor. However, as chair of the SEC Gary Gensler explained in a statement this week, markets have undergone drastic developments since the rule was first introduced in 1976. “Today [23 August], many broker-dealers conduct significant cross-exchange or off-exchange activity. Yet, some of today’s broker-dealers continue to rely on an exemption from national securities association registration that’s older than the cell phone era. This has led to a regulatory gap whereby a number of firms that have cross-market, monthly trading volume valued in the hundreds of billions of dollars are exempt from national securities association oversight.” Gensler further added: “I support this adoption because I believe it will modernise the rule to enhance cross-market and off-exchange oversight for some of the most active participants in the capital markets.” Commissioner Caroline Crenshaw highlighted that the decision will extend FINRA’s oversight to potentially dozens of broker-dealers. The rule has divided the market, with conflicting opinions on the benefits of such a move. Lizárraga said: “These amendments bring transparency to off-exchange activity and level the playing field for firms that provide liquidity on and off-exchanges […] overall, these reforms promote markets that are fairer, more efficient and transparent, and also more resilient and stable, with lower spreads that benefit retail investors.” However, whilst some, like Gensler and Lizárraga, highlight key benefits including increased transparency and strengthened oversight in the treasury markets, others question the effect it may have on liquidity. Commissioner Mark Uyeda on 23 August stated his staunch opposition to the rule, pinpointing the substantial downside risk these amendments pose, explaining that “it could result in a reduction in liquidity, particularly in sectors of the market that can least afford it”. He added that the amendment also includes a conflict-of-interest angle: “The Commission’s findings in favour of a mandatory expansion of FINRA membership are based largely on FINRA’s own submission. But FINRA has a conflict of interest here as these amendments would benefit FINRA in terms of increased revenues.” Once the final rule is published in the federal register – taking effect 60 days from posting – firms will have a year to comply.



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