FINRA Fines Firm for Trade Surveillance Failures
A firm settled FINRA charges for failing to reasonably supervise and investigate surveillance alerts for manipulative trading.
According to the AWC, the firm disabled its prearranged trading surveillance despite inquiries from other broker-dealers about more than 40 customers engaged in potentially suspicious activity. FINRA stated that when the function was later enabled, over 10,000 alerts were generated but never reviewed. FINRA highlighted that the firm dedicated insufficient resources to the review of surveillance alerts, at times relying on a single employee before later adding staff and noted that reviews remained unreasonable because personnel received no written training or guidance. FINRA further noted that, even after the firm implemented a new surveillance system, the same deficiencies persisted. FINRA stated that the system generated more than 15 million alerts, nearly all of which were closed without meaningful review, leaving more than 5 million alerts unaddressed.
FINRA found that the firm failed to establish a supervisory system designed to review and address surveillance alerts for manipulative trading, including spoofing, layering, cross trades, wash trading, and prearranged trading. FINRA found that the firm’s written supervisory procedures lacked guidance on what factors to consider when assessing alerts, how to evaluate explanations from customers, how to document reviews, or when to escalate concerns to a supervisor. FINRA determined that nearly 150,000 alerts were generated, most of which were closed without investigation—often on the same day, in bulk, and without oversight.
FINRA determined that the firm violated FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision").
To resolve the matter, the firm agreed to (i) a censure, (ii) a $1,000,000 fine (with $81,056 payable to FINRA and the remainder paid to various exchanges), and (iii) an undertaking to retain an independent compliance consultant.