Brokers that offer traders the chance to buy less than a full share of a stock are set to face more scrutiny from a key industry watchdog.
(Bloomberg) — Brokers that offer traders the chance to buy less than a full share of a stock are set to face more scrutiny from a key industry watchdog.
The Financial Industry Regulatory Authority said how fractional-share trades are reported will be a focus of its examinations in 2023. The industry-backed regulator said supervisors will also look at compliance with fair-pricing rules for fixed-income trades, according to a report released on Tuesday.
Finra said fractional share reporting is complicated by trading facilities not being set up to support orders, or trades reported in less than full increments. Some brokers don’t have adequate systems or procedures in place to report the shares on time, Finra said. The regulator has asked firms to consider whether they’re giving clients enough disclosures on how they handle orders of these shares.
Finra also said it’s found that some brokers have been charging “substantial mark-ups” in short-term fixed-income securities that could reduce the yield to investors.
Brokers are required to mark bonds and other fixed-income securities to the prevailing market price when charging a mark-up or mark-down. They should be conducting periodic reviews of the mark-ups and mark-downs and comparing them with industry data, Finra said.
Cybersecurity
Financial crimes, including money laundering and market manipulation, as well as cybersecurity incidents, joined the roster of categories of focus for Finra examiners. Some brokers don’t have well-designed procedures for investigating cybersecurity incidents and considering whether filing a suspicious activity report is required for them, Finra said.
The watchdog is also homing in on huge price swings in a number of small-cap IPOs in 2022 for potential market manipulation, according to the report.
The unexplained price swings on the day of or shortly after the IPOs “appear to be associated with trading by apparent nominee accounts that invest in the small-cap IPO and subsequently engage in apparent manipulative orders and trading activity” known as ramp-and-dump schemes, Finra said in the report.
Finra encouraged brokers to be on alert for indications of manipulative trades schemes and to make sure they have programs in place to address them.
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