Broker Settles FINRA Charges for Trade Surveillance Failures

A broker settled FINRA charges for failing to detect a customer's spoofing of thinly traded options.

According to the AWC, the firm provided "online brokerage services for self-directed options trading to its retail and professional customers." FINRA found that the firm's automated spoofing alert triggered only if a non-bona fide order was canceled within seconds of a bona fide order. FINRA determined that the parameters for the alert were poorly suited to illiquid options, where orders can sit unfilled for minutes. FINRA found that the firm missed a customer's repeated spoofing in thinly traded options, including on at least 21 days over a two month period, which resulted in over $1 million in profits. As a result, FINRA found that the firm's trade surveillance program was not reasonably designed to detect and report suspicious trading.

FINRA also found the firm routinely closed surveillance alerts with generic, pre-populated comments, did not reasonably review potential wash trades, and relied on a manual review of roughly 5,100 money movements across about 1,400 accounts that lacked customer income or asset data. Further, FINRA said the firm failed to conduct ongoing customer due diligence and did not investigate two customer accounts even after receiving regulatory inquiries about them.

FINRA determined the conduct violated FINRA Rule 3310(a) and Rule 3310(f) ("AML Compliance Program") and FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade").

The firm consented to a censure and a $210,000 fine, and agreed to certify within 90 days that it remediated its trade surveillance program.