FINRA reminded firms of trade reporting requirements when effecting OTC trades in equity securities on a "net basis." FINRA expressed concern that some firms might be using net basis trading reports to artificially expand their trading statistics (making it look as if they are doing twice as much volume). FINRA cautioned that this manipulation of trading statistics could be viewed as a regulatory violation.

In its Notice, FINRA describes the difference between reporting riskless principal transactions (which would be publicly reported as a single trade) and net basis trades (which would be reported as two trades). FINRA defines a "net basis" trade as essentially a "riskless principal" trade (meaning a simultaneous purchase and sale of the same security), but under FINRA's definition, offsetting buys and sells are considered riskless principal only if they are at the same price. A net basis trade is one where the offsetting purchases and sales are at different prices.

Beyond its discussion of trade reporting, FINRA describes the obligations of broker-dealers as to the execution of customer trades.

Commentary / Steven Lofchie

Any time that FINRA puts out a cautionary notice, it is a good time for firms to focus on the concerns raised. FINRA's expressed concern here is that firms may be manipulating their trading volumes. That is something of a new issue, and therefore, is likely one that should be raised with traders.

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