SEC Charges ATS with Failing to Protect Subscriber Data

The SEC charged Lava Flow, Inc. ("Lava Flow"), an alternative trading system ("ATS"), with improperly disclosing its subscribers' confidential trading information to an affiliate.

Regulations require an ATS to establish and enforce safeguards and procedures to protect the confidential trading information of its subscribers. According to the SEC's order, over the course of a three-year period, Lava Flow violated Regulation ATS Rule 301(b)(10) ("Requirements for Alternative Trading Systems") by allowing its affiliate, Lava Trading, Inc. ("Lava Trading") to access and use Lava Flow's customers' confidential non-displayed orders for the purposes of Lava Trading's smart order router without customers' consent. Lava Flow was also charged with willfully violating Regulation ATS Rule 301(b)(2), for failing to disclose such practices on its Form ATS and for aiding and abetting a violation of Exchange Act Section 15(a) ("Registration and Regulation of Brokers and Dealers") by Lava Trading, which continued to provide broker-dealer services for months after it had deregistered.

See: SEC Press Release; SEC Order. See also: SEC Charges Dark Pool Operator with Failure to Safeguard Confidential Trading Information (with Lofchie Comment) (June 6, 2014).