A Reflection on FINRA's History: 1960s

Upholding Fairness Through Market Transparency

At the start of the 1960s, daily trading volume on the New York Stock Exchange (NYSE) had skyrocketed, and by 1968, daily trading volume had reached 12 million shares a day. While the popularity of the markets was a good sign for the economy, Wall Street was quickly overwhelmed. At the time, before automated systems and computerized processing, messengers delivered paper stock certificates by hand and broker-dealers were increasingly unable to handle escalating volumes of orders, including delivering, settling, and clearing trades.

With Wall Street back offices struggling to control their records and costs, the “Paperwork Crisis” led to billions of dollars in failed transactions, millions in stolen securities, and further demonstrated the importance of providing accurate, reliable, and automated quotations on over the counter (OTC) securities that both dealers and the investing public could depend.

In response, NASD shortened trading hours to offer some relief and developed the National Securities Clearing Corporation (NSCC) to automate clearing, reform price discovery, automate surveillance, and—eventually—create and disseminate price quotations in real time.

However, in the words of then-NASD President Richard Walbert, “the single most significant job” a self-regulatory organization (SRO) had ever taken on was underway. In 1968, NASD contracted the Bunker-Ramo Corporation to build what would become the National Association of Securities Dealers Automatic Quotations (NASDAQ). The new quotation system’s potential for streamlining transactions, gathering data, and democratizing access to the market made it invaluable.

Fast forward to the 1970s, when NASDAQ’s February 1971 debut represented a dramatic change for NASD members and regulators. In the 3,000 securities listed on its multi-tiered service, spreads between bids and asks shrank, transaction speeds accelerated, and transparency and competition increased as the public became more aware of securities’ quoted prices. From a consumer’s standpoint, it was, as one member later recalled, “the best thing that happened to the over-the-counter market."

In the 1975 amendments to the Securities Exchange Act of 1934, Congress reaffirmed the SRO model and established a National Market System (NMS). Congress envisioned a system that fostered competition of exchange business models, which spurred price competition across those same markets. Importantly, the amendments also required the creation of a centralized data processor that would consolidate all quote and trade data across markets in real time to better inform investor and market participant trading decisions. This mandated central reporting of prices formed the basis for all of FINRA’s later transaction reporting and data collection systems: Alternative Display Facility (ADF), Trade Reporting Facilities (TRFs), Trade Reporting and Compliance Engine (TRACE), and Over-the-Counter Reporting Facility (ORF).

FINRA’s Market Regulation and Transparency Services Today

As one of FINRA’s founding principles, transparency plays a critical role in upholding fairness and efficiency in the U.S. stock markets today. Through lowering transaction costs and working to level the playing field, transparency promotes public trust in our markets. Furthermore, the data that market transparency provides serves as the lifeblood of FINRA's surveillance program.

Currently, FINRA operates a suite of market transparency systems for fixed income and equity securities, overseeing millions of transactions and supporting thousands of users across hundreds of firms. This includes TRACE, the Trade Reporting and Compliance Engine—the first system to provide regulators with a complete view of transactions in the U.S. Treasury securities and corporate bond market, as well as equity reporting facilities both for National Market System (NMS) stocks and unlisted equity securities. In addition, we are in the process of implementing a new securities lending rebate rate and transparency facility that will provide the marketplace with consolidated, validated, and regulated transparency regarding the price of borrowing securities.

The Transparency Services team of FINRA’s Market Regulation and Transparency Services (MRTS) department is made up of about 60 staff and operates FINRA's trade reporting and quote facilities for equity and fixed income securities. The information is vital to the marketplace, as it facilitates price discovery and provides transparency regarding asset prices in real time. It also forms the foundation for a regulatory audit trail which enables surveillance and oversight—the cornerstone of FINRA's mission to ensure investor protection and market integrity. The data collected through Transparency Services’ systems enables FINRA to better protect investors, run surveillance, conduct exam programs, and give investors the information they need to make wise investment decisions.

Innovating Toward the Future

Today, MRTS remains a leader in market surveillance, embracing technological advancements like Cloud migration, adopting AI and deep learning models, and integrating market data into surveillances. Always innovating, the team launched a multi-year initiative in 2020 dedicated to improving trade reporting and reference data management capabilities for member firms.

The U.S. Securities and Exchange Commission (SEC) recently implemented a new rule mandating the reporting of securities loan transactions to a registered national securities association (RNSA), of which FINRA is currently the only one. This is a significant transparency initiative, and FINRA has worked to build out the facility to collect and disseminate securities lending data. Relatedly, FINRA is working to launch a new SEC-sponsored product (tentatively slated for 2026) to support secured lending. As FINRA’s MRTS team looks to the future, their focus remains on bringing additional transparency to markets and investors, as well as bringing additional data sets to enhance FINRA’s surveillance capabilities. To do so, they’ll continue to evolve with the markets and the industry, adapting to changes and demonstrating a readiness to meet future challenges.

Stay tuned for the next article about FINRA’s history coming on Jan. 7, where we’ll delve in to the 1970s and discuss NASDAQ’s lasting impact on the industry.