High-Speed Traders’ Technology Controls Are Focus of Finra Probe

The Financial Industry Regulatory Authority is investigating whether high-frequency traders have established controls to ensure their algorithms don’t malfunction and cause broader harm to markets.

Finra sent letters this week to about 10 trading firms asking nine detailed questions about how they use and deploy algorithms, according to George Smaragdis, a spokesman for the U.S. brokerage industry’s self-regulator. Finra had expressed concern about how firms supervise trading algorithms after Knight Capital Group Inc. bombarded exchanges in August with mistaken orders that cost the company $400 million.

The examination, described in a letter on Finra’s website, as part of an effort to explore technology controls more deeply, according to exam priorities the Washington-based regulator published in January. Finra asks firms in the letter to disclose whether they use kill switches to halt individual algorithms and under what conditions they would shut off trading.

“In light of several high-profile algorithmic trading failures that caused significant market disruption in 2012, Finra continues to be concerned about how firms are supervising the development of algorithms and trading systems,” the regulator said in a document laying out examination priorities for this year.