In the wake of recent episodes of so-called “rogue trading”, the Financial Industry Regulatory Authority issued guidance to firms outlining best practices for detecting and preventing such unauthorized proprietary trading.

FINRA’s regulatory notice on the issue is intended to assist firms in the process of reviewing and modifying their internal controls against unauthorized trading. Sound practices detailed in the notice include: heightened scrutiny of red flags such as trading limit breaches, unrealized profit and loss on unsettled transactions, unusual patterns of cancellations and corrections, a pattern of aged fails to deliver; increased password security and other protections of firm systems and risk management information; and creating a stronger compliance culture within the firm.

The guidance was formulated after soliciting input from a range of firms regarding their internal controls. The regulator says that the relevance and feasibility of implementing these practices will vary depending on a firm’s size and business model.

“The risks associated with unauthorized proprietary trading are not new, and most firms that allow traders to commit the firms’ capital already have policies and procedures in place to prevent unauthorized trading,” said FINRA CEO, Mary Schapiro. “But recent events highlight the importance of routinely and rigorously assessing the adequacy and efficiency of those systems – particularly in light of the increasingly global nature of the financial services industry, the highly competitive trading environment and the complexity of many of the products being traded.”