Reuters: Regulatory News: Regulatory watchdog FINRA to oversee Direct Edge's surveillance

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Regulatory watchdog FINRA to oversee Direct Edge's surveillance May 22nd 2013, 14:37 NEW YORK | Wed May 22, 2013 10:37am EDT NEW YORK May 22 (Reuters) - The Financial Industry Regulatory Authority said on Wednesday that U.S. exchange operator Direct Edge has agreed to allow the regulatory watchdog to look out for abusive trading activity on its two stock exchanges. FINRA will now have surveillance oversight of more than 90 percent of U.S. equity trading volume under an agreement that will expand its services from about 80 percent of the market. Direct Edge expects the oversight agreement to become operative in the fourth quarter, FINRA said in a statement, when all of the exchange operator's third-party regulatory services will be consolidated with FINRA. FINRA already performs examination and disciplinary services on behalf of Direct Edge, which vies with BATS Global Markets as the third-largest U.S. exchange operator. The services FINRA performs for U.S. exchange operators, including NYSE Euronext and Nasdaq OMX, has come under scrutiny because of the exchanges' status as self-regulatory organizations, or SROs. Critics in the financial services industry have questioned whether exchanges should retain SRO status while outsourcing the bulk of their regulatory functions to FINRA. Thomas McManus, chief compliance and regulatory officer at Direct Edge, acknowledged last week that while FINRA does the "heavy lifting," conducting exams and providing recommendations, "we make the ultimate decision." Even with FINRA overseeing surveillance the exchanges retain responsibility and still conduct their own work, McManus said. "It's not just a 'check-the-box' exercise," he said at a Securities Industry and Financial Markets Association conference. Commissioner Luis Aguilar of the Securities and Exchange commission said two weeks ago that the SEC needs to rethink how it supervises financial marketplaces. He said that conflicts of interests between SROs and their members, including shareholders among others, may lead these organizations to be "less inclined to enforce rules vigorously." SROs are not just exchanges. FINRA and other organizations, including the National Securities Clearing Corp and the Depository Trust Co, are SROs. In October 2011, the SEC sanctioned units of Direct Edge amid allegations its weak internal controls led to millions of dollars in trading losses and a systems outage. No fine was levied, but Direct Edge was required to correct the problems and take remedial measures. Link this Share this Digg this Email Reprints

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