FINRA Warns Against Fraudulent IOIs Once More... Not Even "Or Else" Follows

Tyler Durden's picture

One of Zero Hedge's recurring concerns with market abuse has been the concept of manipulated natural Indications of Interest, or IOIs, a topic which readers can catch up on here and here. And yes, absent feedback from regulators this could have added to the ever increasing list of conspiracy theories broached by Zero Hedge. Yet ironically shortly after Zero Hedge first posted on this, FINRA came out with the following regulatory notice 09-28 from May 2009, in which the regulator "reminded firms of their obligation to provide accurate information in disseminating indications of interest."


In typical fashion, FINRA talks the talk, yet when it comes to actually enforcing its own regulations against market manipulation substantiated by copious incriminatory evidence, the regulator runs like the toothless hag it is. And just in case perpetrators of the illegal IOI gambit did not hear the warning the first time around, FINRA gives all the firms it hopes to plant its current employers at, yet another warning. Trader's Magazine points out that twice is the charm for slapping hands when it comes to FINRA and its mellifluously named SVPs:

Jon Kroeper, senior vice president at FINRA, said at the Investment
Company Institute conference in New York last Thursday that
broker-dealers sending out traditional IOIs "through their OMSs or a
service provider" must play by the rules. They must "be sure the
information is accurate and not purposefully misleading,
" he said. If
they send out IOIs tagged as naturals, they must have natural orders in
hand and for the size they're advertising.

In other words, Wall Street's SRO is telling the organizations it is supposed to police that even it has no intent of regulating: after all firms, whose ethics has been proven beyond reproach over and over, can regulate themselves much more effectively and cheaply. After all, does anyone even remember when the last time was that some Wall Street company acted not in the best interest of market and investor integrity? 

If a firm represents "natural trading interest" and doesn't have it,
"that's a concern," Kroeper said. He also said that "when a firm puts
out an IOI with a size and that's not what they have"--as in, they
never had that size order or it's no longer available--that's another
cause for regulatory concern. The most popular IOI distribution
services are Bloomberg and Tradeweb (formerly known as AutEx).


At least FINRA is "concerned" - if there ever was a key word that the
unbiased and studly Wall Street sheriff is about to take matters into his own
hands, this has got to be it.

Kroeper added that FINRA is not looking to define what a natural IOI
is. However, he said, "we want to make sure that firms, when they use
these systems...use them consistently."

Cause Goldman knows that 10,000 blocks of SPY appearing 100 times in a minutes courtesy of JPM's ETF IOI blasting, are always completely and totally natural. Just like porn -  you know it when you see it.

This problem of sending out misleading IOIs isn't new. IOIs can be a
useful way to source block liquidity, and a tool to let buysider
traders and others know who's the axe in a particular stock. But IOIs
can also be used by brokers to draw out information about block flow
that institutions are reluctant to divulge.

In other words, even though FINRA has made it abundantly clear that the mechanism of "natural" yet fabricated IOI dissemination is potentially grounds for enforcement action, it continues to do nothing. And the same is likely true of its bigger and even more worthless analog, the SEC, when it comes to Actionable IOIs in Dark Pools. But of course, there is nothing wrong with either of these, critics will say: they are just how the market operates. If in the process of "operation" the market is gunned up on occasion (or every single day, as the actual case may be) nobody is the wiser: after all the direction of manipulation is up, and when is the last time anyone heard the regulators complaining about that? Heaven forbid we have one of those historical events known as a downtick, and we give the SEC a whopping 60 minutes before not only the downtick rule is implemented, but exercising the "sell short" option in retail and institutional brokerages is immediately punishable by listening to Mary Schapiro talking softly about how honest the regulators are for 24 hours non stop.

So even as FINRA vacilates for the next decade, unsure of just how to prevent its soon to be Wall Street employers from continuing to breach market integrity, Zero Hedge will continue to demonstrate each and every occasion in which JPM or whoever decides to flagrantly ignore FINRA notice 09-28. With some luck, by the time the current FINRA execs are collecting their annuities from Goldman's compliance department, some actual action may even be forthcoming. 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Anonymous's picture

Earlier this evening, while the drinking was light, I was cleaning a gun, and feeling alright.

I turned the radio on, it was Monday night.

Some dude said FINRA, was leading alright, invest with FINRA, and I'd be alright.

But seriously I think I heard a finra commercial on monday night football.

Anonymous's picture

Picked up the following Credit Suisse brochure on "Advanced Execution Services(R) The Standard in Algorithmic Trading (R)" at the TradeTech West Conference in SF last week.


"The difference is secrecy. Confidentiality is more than just an aspect of good customer service with AES; it is a cornerstone of our trading strategy whcih revolves around the concept of reducing signals. We never shop order flow and never advertise our volume in a name. AES orders are never seen by traders, market-makers, sales-traders, sales-people, or anyone else except dedictaed AES desk support personnel. To help ensure this, we have brought in a global "Big 4" auditing firm to assess the effectiveness of our information barriers. Ask your AES sales personal for a copy of the most recent report."

It goes on to quote Sun-Tzu...

"Be extremely subtle,
even to the point of formlessness.
Be extremely mysterious,
even to the point of soundlessness."

Speaking of Sun-Tzu, Tyler... Are you planning to be at

No need to answer. In any case I'm gald you found the FINRA IOI link on daily credit interesting.

Yours truly, Narrator

Fritz's picture


FINRA reports to LLoyd B. in the org chart, just below the SEC and the White House.

WTF did you expect?

Sqworl's picture

+1000000 Stupid Robot by SIA, owned by GS.

Head of FINRA was well paid to look the otherway at Citi...then went to NYSE to clean house collect more $$$ and then to retire at FINRA..laughing all the way to the Bank.

Anonymous's picture

Who regulates IOIs in UK/Europe?

Cognitive Dissonance's picture

"after all the direction of manipulation is up, and when is the last time anyone heard the regulators complaining about that?"

There has always been a "natural" bias upward. After all, when the economy grows, it's "natural" for the market to grow. But this tendency has been helped to such a degree lately that it has become down right criminal. Of course, when many are making money (or at least paper profits) who would complain?

Regardless of your long or short position at the time the bias is being helped along, you have taken that stand for various "natural" reasons and the basic unfairness to the entire market (yes, even those who are long and being rewarded) shows up in increased volatility and, in my opinion, the ultimate instability of those long positions. If they didn't go up naturally, there is a much greater tendency for them to go back down.

What really burns my ass is the inherent corruption of the system, using the "natural" tendency of those making money not to complain about the situation. Even those who are long and see the obvious manipulation aren't likely to complain when it's to their benefit. Everyone loves a little jingle in the jeans.

Even my mother, who wouldn't know the difference between a stock market and a farmers market, saw the obvious conflict of interest and was angered when I explained what was going on in response to her question of why the market was going up in the face of an obviously bad economy. 

Of course, maybe my "natural" tendency to be biased against manipulation came out in my explanation and influenced her response. But as long as I got what I wanted, what's wrong with that?

Anonymous Hand's picture

+1 for your subtle self-aware humour.

zice's picture

Remember even Dorian Gray had natural tendencies. I would think that this great un-masking is pricking everyones sensibilities as the true picture of themselves is revealed.

Thurgy's picture

How about a damn program trading tick rule, or program to program restrictions.  I don't know and haven't given it much thought but what is a solution to stop computers from ever having more than 50% control over the market.

deadhead's picture

Isn't this kinda like Chuck Schumer "asking" the Fed to be more transparent?

FINRA is an embarassment. 

SEC is worse.

President Obama must get rid of Mary Schapiro now.

Daedal's picture

Haven't seen any coverage of CFTC. I'd be curious to see what they have been up to.

Anonymous's picture

"...exercising the "sell short" option in retail and institutional brokerages is immediately punishable by listening to Mary Schapiro talking softly about how honest the regulators are for 24 hours non stop."

Best comment ever.

Anonymous's picture

This is worse than you make it out to be, for once.

IOI's are frequently used by Goldman, Knight, etc., when they have a customer order that is big enough to make front running profitable. They can't just trade ahead of customer, so they get someone else to do it. IOI's are how they let the other players know that there is a big order. They are saying "please move the market for me so I can fill my customer at a bad price".

But couldn't someone game this system -- i.e. send a *fake* IOI that pretends to be a customer, that would cause other HF operations to move the market when no customer order exists? Maybe after taking a position that would profit from this move? Absolutely, and this is what FINRA is warning traders not to do.

They are telling traders that the IOI system is only to be used for gouging customers, and is not to be diluted by spoofed order flow. This way the guys getting these IOIs don't have to think twice about what they mean....

Anonymous's picture

Hmmm, i wonder if this was in GS manipulating secret sauce. How easy it would be to ping the market (or stock) with the code! Would too many pings add up to a DoS?

Anonymous's picture

Have you ever tried front running an IOI ?.. most are fake "naturals" anyway.. it's not like front running a known order it's like front running the ghost of an order.not a profitable strategy