United States: FINRA To Expand Registration Requirements For Developers Of Algorithmic Trading Strategies

In its continued efforts to monitor and regulate algorithmic and high frequency trading, FINRA has received SEC approval to amend NASD Rule 1032(f) to expand the scope of individuals required to register as a securities trader. Beginning January 30, 2017, the amended rule will require a person to register as a securities trader if that person is primarily responsible for the design, development or significant modification of an algorithmic trading strategy relating to equity, preferred or convertible debt securities; or responsible for the day-to-day supervision or direction of such activities.

What types of algorithmic trading strategies fall under the amended rule?

The threshold question in examining the amended rule is whether the automated trading system qualifies as an "algorithmic trading strategy." FINRA has defined an "algorithmic trading strategy" as an automated system that generates or routes orders, as distinct from automated systems that simply route orders (i.e., makes no trading decisions, but routes retail orders in their entirety to a particular market).

Examples of systems that are considered algorithmic trading strategies if they generate or route orders include:

  • an arbitrage strategy, such as index or exchange-traded fund (ETF) arbitrage;
  • a hedging or loss-limit algorithmic strategy that generates orders on an automated basis;
  • a strategy that involves simultaneously trading two or more correlated securities due to the divergence in their prices or other trading attributes;
  • an order generation, routing and execution program used for large-sized orders that involve dividing the order into smaller-sized orders less likely to result in market impact;
  • an order routing strategy used to determine the price or size for routed orders, the use of "parent" or "child" orders, or displayed versus non-displayed trading interest;
  • a trading strategy that becomes more or less aggressive to correlate with trading volume in specified securities;
  • a trading strategy that generates orders based on moving reference prices;
  • a trading strategy that minimizes intra-day slippage in connection with achieving volume-weighted average prices and time-weighted average prices; and
  • a strategy that creates or liquidates baskets of securities, including those that track indexes or ETFs.

If the automated system in question falls under FINRA's definition of an "algorithmic trading strategy," the new registration regime in amended Rule 1032(f) applies.

What type of "primarily responsible" individuals is FINRA looking to have register?

One of FINRA's general objectives is to have individuals who are knowledgeable about the business or area in question be registered to ensure that those individuals are knowledgeable also about the regulatory regime covering those areas. To that end, FINRA has stated that with respect to an "algorithmic trading strategy:"

FINRA's goal is to ensure that firms identify and register one or more associated persons who possess knowledge of, and responsibility for, both the design of the intended trading strategy (e.g., the arbitrage strategy) and the technological implementation of such strategy (e.g., coding), sufficient to evaluate whether the resultant product is designed not only to achieve business objectives, but also regulatory compliance.

Amended Rule 1032 does not contemplate that every individual that works on, or interacts with, the algorithm will need to be registered. Instead, FINRA suggests that the individual who is primarily in charge of each of the three enumerated life cycle events – design; development; and significant modification – must be registered.

For example, if a lead developer and head trader meet so the head trader can lay out a trading strategy for the lead developer to use when designing an algorithm, those two individuals would have to be registered as Securities Traders under the amended rule. However, the team of programmers that works for the lead developer and implement the design, and the team of traders who use the algorithm would not be required to register under the amended rule.

Further, if the algorithm undergoes any type of "significant" modification, which FINRA defines as "any change to the code of the algorithm that impacts the logic and functioning of the trading strategy employed by the algorithm," then the person directing the modification must also be registered. For example, if an individual directed that the parameters of a trading strategy be adjusted, that change would be considered a significant modification and the individual with primary responsibility for directing that change would require registration.

Are third-party algorithms affected?

To the extent a firm uses an algorithmic trading strategy that was not designed or built by the firm's associated persons (i.e., a third-party was solely responsible for the product), the amended rule's registration requirement would not be triggered. However, if a third-party is hired to develop an algorithm based on a trading strategy designed by the firm, then the individual responsible for communicating the trading strategy to the third-party developers would be required to register as a Securities Trader.

Any modifications to the algorithm that are completed in-house or which are communicated to a third-party by the firm would still require the individual directing those modifications to be registered as a Securities Trader.

How does the rule amendment affect supervision responsibilities?

The individual who supervises and/or directs the day-to-day activities of the team of developers (who is also likely the individual responsible for the development of the algorithm), must also be registered as a Securities Trader. This amended rule dove-tails with FINRA Rule 3110, which requires that all registered persons have designated an appropriate supervisory principal for the business line and a registered representative or principal who is responsible for supervising the person's activities.

In order to comply with Rule 3110, FINRA states:

With the addition of this new activity to the Securities Trader registration category, firms will be required to designate developers to registered persons for Rule 3110(a) purposes. In practice, these developers may not currently report to a registered person. In such instances, FINRA believes it is acceptable for firms to "assign" a lead algorithm developer (or other non-trading personnel) engaging in covered activities to one or more other registered persons of the firm that supervise trading activities outside such developer's or other non-trader's usual reporting line.

In addition, the associated person responsible for monitoring or reviewing the performance of an algorithmic trading strategy must already be registered pursuant to NASD Rule 1032(f). Thus, regardless of the amendment or the use of a third-party algorithm, each firm must still have an individual registered as a Securities Trader who supervises the firm's automated trading activity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.