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.