Broker Settles FINRA Charges for Supervisory Failures Concerning Manipulative Trading
A broker-dealer settled charges by FINRA and other SROs for failing to (i) establish a supervisory system to detect and resolve manipulative trading alerts or (ii) respond to "red flags" generated by an automated surveillance system.
In a Letter of Acceptance, Waiver and Consent, FINRA determined that the firm's systems were insufficient to detect manipulative trading practices such as spoofing, layering, trade washing and marking the close/open. FINRA found that prior to 2015, the broker had no supervisory system in place to flag potentially manipulative trades. FINRA said that from 2015 to 2019, the firm had an automated surveillance system that monitored for potential manipulative trading and generated alerts, but that the firm had limited staff and resources to review and resolve them.
FINRA found several problems with supervision, including, among others, that the firm (i) did not include explicit criteria to define actions that were egregious or significant enough to warrant escalation of an alert and (ii) did not have adequate procedures in place to monitor clients deemed to be "high risk". Further, FINRA stated that the broker failed to, or insufficiently, document the alert reviews that it had conducted.
As a result, FINRA found that the broker violated FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade") and Rule 3110 ("Supervision").
To settle the charges, the broker agreed to (i) accept a censure, (ii) pay a $775,000 fine, of which $83,333.33 is paid to FINRA, and (iii) revise its supervisory system for detecting potentially manipulative trading by customers.
The broker settled these charges simultaneously with related charges of failing to properly register employees with several exchanges. The affected exchanges include Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., The Nasdaq Stock Market LLC, Nasdaq BX, Inc., Nasdaq Phlx LLC and NYSE Arca, Inc.