FINRA Defends Algo Requests as U.S. Worries Grow By Reuters Wednesday, September 21, 2011 6:23:34 PM ET NEW YORK (Reuters)âA Wall Street regulator that requested computer trading codes from some brokerages stressed it was a last-resort investigation and not intended as a "witch hunt," as industry worries grew that secret and highly-valuable algorithms could fall into the wrong hands. Reuters reported on Sept. 1 that the Financial Industry Regulatory Authority, a self regulator of U.S. brokers, had taken the unprecedented step of asking firms to turn over their algos as part of probes into suspicious market activity. The Securities and Exchange Commission has also requested proprietary algo trading data as part of its industry compliance investigations. Tom Gira, who decides when FINRA asks for codes, said on Wednesday [Sept. 21] the requests are rare and happen only when they are an integral part of investigations. "It's not something that we do lightly," Mr. Gira, FINRA's executive vice president for market regulation, said at a market structure conference hosted by SIFMA. "It's really driven in the context of an investigation and truly an item of last resort. We're just trying to get the facts of what we're seeing (in the market). If knowing what the algo was intended to do is part of that analysis, that's what we're asking for." Yet news of the requestsâparticularly given the possibility subpoenas could reveal intellectual property beyond the regulator's wallsâhas many in the industry concerned. Quantitative and high-frequency trading firms such as hedge funds and banks develop algos over years and at great costs so they can profit from complex trading strategies and compete with others. "People have a lot of intellectual property invested in their algorithms and they're quite nervous to have that shared with anyone outside of their firms," said Abby Greenberger, a vice president at D.E. Shaw & Co., one of the world's largest hedge fund firms. "The important thing is that there are additional securities and safeguards put in place," she said, suggesting "confidential treatment provisions" are put in place to protect the data and assurances that only select regulators see it. Vaishali Javeri, director and counsel at Credit Suisse Group AG, told the conference: "Most of the smart algorithmic providers already have controls around their algos (and they're) constantly testing their algos to prevent malfunctions or looking at the aggressiveness of the algos." FINRA staffers can read and understand the code and the regulator is very sensitive to concerns about intellectual property, Mr. Gira said. But he added that FINRA is subject to subpoenas for information. "That's one of the issues that some firms have raised is how can we protect (codes) and we try to protect it as much as we can," he said. "If we get subpoenaed by a government agency, we may have to give that information out." Reuters reported that FINRA and the SEC have policies that bar employees from using the data to their advantage if they leave the regulator to return to the private sector.
Wondering why SEC is not regulating the market capitalization of listed companies while FED regulates the reserve ratio of banks?