NEW YORK (Reuters) – A Wall Street regulator said industry complaints about market manipulation and trade reporting have spiked this year, raising questions about the adequacy of banks’ internal controls over their traders.
Gene DeMaio, of Financial Industry Regulatory Authority (FINRA), said on Wednesday that his group is still investigating these complaints.
On Thursday, UBS AG said a rogue trader, who was later charged in London with fraud, will cost it $2 billion in the third quarter. The loss highlights the extent to which some banks still cannot police their traders.
FINRA has received complaints this year about banks’ audit systems, canceled orders, and brokers misrepresenting whether orders were on behalf of customers, DeMaio said.
“These are areas that for a long time we were not receiving complaints in, and all of a sudden this past year it’s really spiked up,” DeMaio, senior vice president in FINRA’s market regulation unit, told a FIA options industry conference.
“We’ve been getting a lot of complaints about … manipulation — the possibility that somebody is manipulating equity to advantage their option position,” he said.
The UBS rogue trading case could intensify pressure on regulators to ferret out wrongdoing. In the United States, it will also put more pressure on rulemakers to craft tough regulations as they implement the Volcker rule, a part of the 2010 Dodd Frank financial oversight law that limits banks from betting their own money in financial markets.
FINRA has made stopping manipulation a priority the last couple of years. The regulator, funded by the financial services industry, monitors trading and reports to the U.S. Securities and Exchange Commission.
“We’re seeing a large number of order misrepresentations, we’re seeing problems with our audit trail,” DeMaio said, adding some brokerages have identified orders as customer orders when in fact they originated from the firm itself.
FINRA has asked firms if they have seen some of the problems internally, and whether they’ve taken steps to address them, DeMaio added.
Underlining the complexity of policing financial markets, FINRA and the SEC this year took the unprecedented step of asking banks, hedge funds and other high-frequency traders for their algorithmic codes, in order to better understand their trading strategies.
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