When protecting your hard-earned investments, nothing is more important than trust. Trust that your broker will put your interests above all else. Trust in a system designed to treat all participants fairly.
Unfortunately, instances do occur where certain brokers violate that trust, compromising investors for their own profit. One such way is through the controversial practice known as “trading ahead” – executing proprietary trades in front of open client orders, gaining an unfair edge at the client’s expense.
As Columbus investment fraud lawyers, we understand the importance of fair and ethical trading practices. Let’s review how FINRA Rule 5320 aims to prevent “trading ahead” issues that can harm investors.
What Is “Trading Ahead”?
The term refers to when a broker executes a trade for their own account ahead of an existing client order they’re aware of, putting profits over fair treatment of the customer. Specifically, it involves a broker filling a proprietary order at a price that could have satisfied an open client order.
Perhaps the broker sees an opportunity to gain from short-term market movements and acts in their own self-interest before ensuring the client’s trade receives full and fair execution. While the duration of time may be brief, the impact on the client can be real.
Even minor differences in negotiated share price or filing speed can impact investment returns over time. By jumping in front of the client, the broker has inappropriately assigned their own interest higher priority status. If you suspect your broker may have traded ahead, our firm can review your claim confidentially and without charge.
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Why Is It Restricted?
This “trading ahead” behavior is rightfully viewed as a breach of an advisor’s most fundamental duty – to serve the client’s best monetary well-being with complete objectivity and loyalty. By placing their own interests above all others, brokers introducing proprietary trades into the market flow gain an unfair advantage that comes directly at the expense of the client investor.
Prioritizing proprietary trades in this way undermines customers and has the potential to distort typical price discovery signals in the market. When brokers cater to their own benefit rather than impartial execution of unbiased orders, it threatens the integrity and balanced functioning of the entire system.
FINRA Rule 5320 exists to establish clear, unambiguous guidelines that curb this disadvantageous and inappropriate behavior in order to protect investors and maintain confidence in our financial institutions.
What does the Rule Prohibit?
Brokers cannot trade at a price that could satisfy an open client order without first executing the client’s trade up to the same terms. This upholds the client’s priority position and ensures their trading interests are put first before any actions are taken by the firm itself.
Specifically, Rule 5320 prohibits brokers from filling a proprietary order if doing so would circumvent an existing customer limit order held at the same traded price.
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Origin of Rule 5320
The prohibition of trading ahead under Rule 92 by the New York Stock Exchange was a significant move to ensure fairness and integrity in the financial markets. However, with the evolution of regulations and advancements in technology, the NYSE and other exchanges saw the need to update and streamline this rule.
The implementation of FINRA Rule 5320 on September 12, 2011, replaced Rule 92 and provided more detailed direction on trading ahead and its prohibitions. With FINRA Rule 5320 in place, market participants are now required to adhere to stricter guidelines when it comes to trading ahead.
By ensuring that firms have documented policies and procedures in place for trading activities, regulators can better monitor and enforce compliance with these rules. Overall, this change reflects a commitment to upholding ethical standards within the industry and providing a level playing field for all market participants.
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How Can Trading Ahead Harm Investors?
When brokers put their interests ahead rather than upholding fiduciary duties, it can negatively impact investors’ trade executions and costs. The harm may be immediate through receiving slightly poorer prices on trades.
Over longer periods of time though, even minor differences in transaction costs can snowball and meaningfully diminish portfolio returns. Significant violations can even lead to monetary penalties. While certain riskless principal trades are allowed, documentation is critical.
FINRA actively monitors for infractions through examinations and investigating disciplinary actions.
Contact an Investment Fraud Lawyer for a Free Consultation
If you suspect your broker may have traded ahead at your expense, putting their interests before yours, it is understandable to feel distrustful of the system meant to protect you. The lawyers at Meyer Wilson are here to help you determine if improper conduct occurred and, if so, explore your potential options for recourse.
We know from experience how even subtle rule violations can adversely impact investors over time. A free, confidential consultation with our team is the first step to understanding your situation better.
We will take the time to listen without judgment and provide clarity on steps forward. We only accept cases on a contingency fee basis, so you pay nothing until financial remedies are secured. Contact us today to start finding the answers and relief you deserve.
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