With markets at near historic highs, investor confidence still lags. Both regulators and financial firms share the responsibility to do something about it, said Richard Ketchum, CEO of FINRA on Tuesday. High profile frauds, the flash crash and other technological snafus have made headlines and fueled investor doubt, he said in a speech at FINRAs annual conference in Washington, D.C.
Most of us who have lived through the last five years feel like we have had just about everything except pestilence, Ketchum said.
FINRA Surveillance Efforts
For FINRA, changing the dynamic between the financial industry and investors involves policing the market. The self-regulatory organization has tackled that goal by enhancing its surveillance of the industry, Ketchum said.
Last year, FINRA developed cross-market surveillance patterns to keep tabs on more than 50 threat scenarios and watch 80% of the equities market, said Ketchum. The regulator has also enhanced its surveillance of over-the-counter equities not listed on exchanges to search for clues for front running, layering or marking-the-close violations.
FINRA has also drilled down on potential areas of fraud and has referred to the SEC and other regulatory agencies more than 250 issues where fraud was suspected. Those cases were split about evenly between insider trading and fraud referrals, he said, and the results of those efforts will be seen in future SEC announcements.
Nothing creates greater fear in investors and more frustration from the industry than pure, direct fraud, and our ability to escalate and respond to that quickly nothing is more critical for investor confidence, Ketchum said.
Firms: Do Your Part
Firms must work harder to make investors feel less vulnerable and the best way to do that, said Ketchum, is to help clients better understand their investments and the risks they take on. For example, as investors hunted for higher yield and variable rates, they increasingly turned to floating-rate loans in 2012. But many investors did not fully understand the credit, liquidity and valuation risks that come with those investments, Ketchum said.
Three years after the flash crashan event that shook markets and investor confidence alikefirms also need to make sure they have put the proper changes in place to prevent a repeat, Ketchum said. That includes more closely working on developing, testing and monitoring trading algorithms. Those algorithms have been eyed for contributing to certain events like the flash crash because of the sometimes limited scope of their variables. Exchanges and other major trading firms should put kill switches in place so such glitches cannot have a prolonged influence on the market, said Ketchum.
While we may not be able to prevent a technology failure from occurring, our job as a regulator is to implement programs to minimize the impact of the failure, Ketchum said. To that end, FINRA has put single-stock circuit breakers in place and launched a plan that would pause market trading to prevent the dramatic fluctuations that happened during the flash crash.
While we have made significant progress, more work lies ahead, Ketchum said. We're at an inflection point in the markets, which provides us with an opportunity to collectively look at making changes that will help investors regain confidence in the markets.
