The Financial Industry Regulatory Authority regulates the major U.S. exchanges and is the highest authority involved in the education and certification of all financial professionals who operate in the securities industry (brokers and dealers).
The Financial Industry Regulatory Authority Mandate
The Financial Industry Regulatory Authority’s mandate is to ensure the smooth and transparent functioning of securities firms so that investors are confident in the effectiveness and fairness of the U.S. securities market.
To achieve this goal the Financial Industry Regulatory Authority creates regulations that govern and limit the behavior of securities firms. These regulations are intended to reduce rates of fraud and negligence that harm investors and damage investor confidence in the system.
Most Financial Industry Regulatory Authority regulations are highly technical, and aimed at creating rules for the conduct of securities firms that eliminate the potential for purposeful fraud and accidental negligence.
This approach is in contrast to a largely investigative force that spends most of its resources pursuing transgressors. The Financial Industry Regulatory Authority aims to stop violations before they happen through the development of comprehensive rules of conduct, as opposed to a more general system of rules and a focus on prosecuting violations.
The Financial Industry Regulatory Authority also oversees a wide variety of related industry issues, such as the education and training of industry professionals and the arbitration of disputes between industry members. In addition, the Financial Industry Regulatory Authority has been given regulatory oversight of most major U.S. exchanges, as well as most over-the-counter securities dealings.
Trading and the Financial Industry Regulatory Authority
While most of the regulations of the Financial Industry Regulatory Authority are aimed at the actions of securities firms and related financial professionals, these rules do have a significant impact on the behavior of investors and traders.
The regulations developed by the Financial Industry Regulatory Authority govern how the securities industry deals with the investing public, which means that they govern the exchanges that happen between investors and their brokers and dealers.
These regulations cover critical areas in trading, such as the provision of services related to investing (research, etc), the promotion of products by brokers and dealers, the fiduciary responsibility of securities firms and so on.
Therefore, traders should stay abreast of changes to the regulation of the securities industry as dictated by the Financial Industry Regulatory Authority. These regulations will determine how securities firms are able to conduct their business with investors, which will impact how traders are able to conduct their business in turn.
Many regulations developed by the Financial Industry Regulatory Authority are nominally intended to help and protect the public investor, but can actually harm the trading of some or most investors when they are excessively restrictive and onerous, or favor some class of investors over another (usually those investors with the resources to meet high levels of compliance requirements).
Day traders in particular are vulnerable to excessively restrictive securities regulations that limit the services that securities firms are able to offer them. These can include higher margin requirements, the restriction of access to certain products or trading mechanisms and educational or experience requirements, among a variety of other possibilities.
While these regulations are intended to protect naive investors from their own inexperience, they can act as a major impediment to the trading of experienced and knowledgeable retail investors, such as day traders.
The Financial Industry Regulatory Authority is the product of a process of regulatory mergers that has resulted in one supreme regulatory body for the entire securities industry. This process has led to a substantial reduction in overlapping and redundant regulations covering securities trading, and streamlined the process for the development of new regulations.
Day traders in particular should make an effort to follow the activities of the Financial Industry Regulatory Authority as it relates to their trading activity, since the Financial Industry Regulatory Authority is the body that determines the limitations of retail investor access to the markets.
Many regulations that are intended to protect inexperienced investors can severely limit the trading of experienced retail investors, such as day traders.
IMAGE: New York City, USA – October 30, 2017: Sign on the building of Financial Industry Regulatory Authority, or Finra, in Manhattan NYC lower financial district downtown, businessman man walking