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RSMS Detected Firm’s Prohibited Trading Activity

Introduction

Capital Market Solutions' Regulatory Surveillance and Monitoring System (RSMS) plays a critical role in ensuring financial institutions remain compliant with industry regulations. One area where RSMS provides invaluable oversight is in the detection of potential front-running schemes.

Front-running occurs when a broker or trader takes advantage of advanced knowledge of a pending large transaction that will affect its price. By executing trades ahead of the large order, the front-runner can capitalize on any price movement caused by the large transaction. This unethical practice gives the front-runner an unfair advantage and compromises market integrity.

The Case

Recently, a mid-size institutional firm that utilizes CMS's RSMS surveillance solution uncovered a potential front-running issue during a routine review of system alerts and exceptions. The firm has numerous trading desks executing orders across multiple asset classes for a diverse pool of institutional and individual investor clients. It reported a case of front running.

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Introduction

RSMS (Regulatory Surveillance and Monitoring System) is a comprehensive solution provided by Capital Market Solutions (CMS) designed to assist financial institutions in monitoring and ensuring compliance with various regulatory requirements. This powerful tool leverages advanced algorithms and sophisticated data analysis techniques to detect potential violations, anomalies, and prohibited trading activities.

Prohibited trading activities refer to any transactions or practices that violate the rules and regulations set forth by regulatory bodies such as the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). These activities may include insider trading, short sale, market manipulation, front-running, and other forms of unethical or illegal trading practices. Failure to identify and address prohibited trading activities can result in severe consequences, including hefty fines, reputational damage, and regulatory sanctions.

The Case

A mid-size institutional firm, utilizing CMS’s RSMS Surveillance solution, was conducting a routine review of RSMS-generated alerts and exceptions related to short sale regulation, specifically Regulation SHO (Reg SHO). They found the firm’s prohibited trading activity. A mid-size institutional firm, using CMS’s RSMS Surveillance solution, detected prohibited trading activity during a routine review of RSMS-generated alerts and exceptions related to Regulation SHO (Reg SHO), governing short sale regulations. A short sale is a trading strategy where an investor sells borrowed securities intending to buy them back at a lower price to profit from the price difference.

How RSMS Helped

The RSMS Reg SHO Surveillance module detected that the firm was conducting prohibited short-sale trades. According to FINRA Reg SHO rule 201, firms are not allowed to sell short at a price at or below the National Best Bid for a prohibited stock subject to the Tick Test. RSMS identified this prohibited trading activity under Reg SHO rule 201, enabling the firm to take corrective action promptly.

Without the RSMS Reg SHO Surveillance module, the firm might not have been able to detect and correct this issue, potentially resulting in a regulatory inquiry and substantial fines from FINRA.

Conclusion

The case study highlights the critical role that CMS’s RSMS solution plays in helping financial institutions maintain regulatory compliance and mitigate the risks associated with prohibited trading activities.

By leveraging advanced surveillance capabilities, RSMS empowers firms to identify potential violations proactively, implement corrective measures, and avoid costly penalties. As regulatory requirements continue to evolve, solutions like RSMS become increasingly essential for ensuring the integrity of financial markets and protecting the interests of investors.

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