Firm Fined for Anticipatory Hedging of Options Trading

A firm settled charges with NYSE American and NYSE Arca (see here and here) for executing equity transactions in advance of the markets becoming aware that the firm was also in the process of executing customer orders for related options.

In separate Letters of Acceptance, Waiver, and Consent, NYSE American and NYSE Arca found that in several instances, the firm, which acted as a broker-dealer and market-maker, entered hedging orders to sell underlying securities before customer option orders had been made public to the NYSE American and NYSE Arca trading floors. The Exchanges found one instance in which the anticipatory hedging appeared to be caused by a misunderstanding by one trader at the firm believing that the options order had been exposed to the public.

The Exchanges also asserted that the firm's procedures to flag potential anticipatory hedging transactions were not sufficient.

As a result, the Exchanges determined that the firm violated (i) NYSE American Rule 995NY(c) and NYSE Arca Rule 6.49-O(b) and (ii) NYSE American Rule 320(e) and NYSE Arca Rule 11.18(b) for supervisory failures to ensure compliance. To settle the charges, the firm agreed to (i) a censure and (ii) pay a $65,000 fine to NYSE American and $75,000 to NYSE Arca which are resolved simultaneously for similar matters with other exchanges, for a total fine of $230,000.