Just as traders in investment banks need to know how to code, those developing trading algorithms need to understand the securities industry and must pass a new exam to show their competence. And, if something goes wrong with their strategies, they’ll be held responsible.
Everyone responsible for developing or designing algo trading strategies will now have to sit The Financial Industry Regulatory Authority (Finra) Series 57 Securities Trader exam by January 30, 2017. Previously, only traders were required to pass this. However, the logic is more that algo trading developers should have no excuse for ignorance of securities law.
“The regulators talk in terms of education, ‘We want algorithm designers to understand what it takes to be successful in trading algo design and be compliant with regulations,’ but really they want to have people to go after if something goes wrong and an algorithm violates securities rules,” said R. Scott Garley, co-administrative director, head of securities litigation and co-head of hedge fund and private equity group at the Gibbons law firm. “There will be heightened scrutiny of developers’ algorithms and their work overall, and they’ll be subject to a fine if something goes wrong.”
This rule applies equally to algo coders at sell-side and buy-side firms. As long as the employee is primarily responsible for the design (trading instruction or strategy), development (coding) or significant modification of an algorithmic trading strategy, then they will have to officially register with the regulator.
The cost is just $120, but you’ll need to sit a 3 hours 45 minute exam and score at least 70% to pass. The good news, however, is that it’s down to employers to ensure that everyone is compliant. You can begin studying for the exam if you’re interested in getting into this space, but ultimately you’ll need the sponsorship of a broker-dealer before you’re eligible to sit it.
However, while it’s long been common practice for traders to fall under the regulatory jurisdiction of Finra, those on the algo trading side of the business may be more reluctant to do so. This has the potential to lead to some talent shortages.
“In general it’s harder to recruit, hire, train and retain algorithmic developers, because they tend to be kind of a free-spirited renegade gang, and they might balk at having to be subject to the jurisdiction of the regulators. Even if you’re inclined to do it, it’s a burden and a hurdle, and developers are typically a more difficult crowd to get in line than others at a financial services firm,” said Garley.
The Series 57 Securities Trader exam requires approximately 75-100 hours of prep. Given that the S57 is a rep-level exam and not a supervisory exam, candidates who have no experience in the securities business or any knowledge of Finra can still prepare to pass it, said Brian Marks is a managing director at Knopman Marks Financial Training, a qualification exam training firm.
“The exam requires understanding of many trading regulations that form the foundation of electronic trading and securities exchanges, as well as more general rules and regulations and basic securities products – equities, convertible bonds and mutual funds are a few examples,” he said.
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