Wall Street's industry-funded watchdog is ramping up its scrutiny of high-frequency trading firms as efforts to manipulate U.S. markets through the technology grow more sophisticated, the regulator's chief said on Tuesday.
The Financial Industry Regulatory Authority will examine how well high-frequency trading firms are protecting their systems from unscrupulous traders who are trying to manipulate markets, according to a list of its 2016 examination priorities for Wall Street firms, published on Tuesday.
High-frequency trading is an automated strategy that can move billions of dollars worth of trades in a fraction of a second.
FINRA's heightened focus on controls in place at high-frequency trading firms coincides with the growing prevalence of a new and more complex form of spoofing, a type of manipulation that involves faking orders for a security to deceive the market by creating the illusion of demand, said Richard Ketchum, FINRA's chairman and chief executive, in an interview.
The regulator is observing more instances in which traders are using multiple firms to place those orders, Ketchum said. The strategy can make the conduct trickier to track.
Spoofing occurs when traders place orders in markets without intending to execute them. The traders immediately cancel the orders, but other market participants mistakenly believe the price of the security has moved.