The Securities and Exchange Commission has filed a civil case against Wedbush Securities Inc. and two of its officials. The regulator claims they violated a rule that mandates that firms have proper risk controls in place before giving customers market access.
According to the SEC order, between 2011 through 2013 Wedbush allowed most of its market access customers to send orders straight to U.S. Trading venues and did not keep up direct and sole control over trading platform settings. Customers used these platforms to transmit orders to the markets.
The Commission contends that Wedbush should have had the mandated pre-trade controls in place. It claims that the firm failed to perform a yearly review of its risk management controls related to market access and did not limit trading access to people that the firm had authorized and pre-approved. As a result, overseas traders who were never approved and may not have been in compliance with U.S. laws ended up having market access.
SEC Enforcement Division Andrew J. Ceresney says that the SEC will hold Wedbush accountable for profiting while failing to protect the US markets. His agency says that Jeffrey Bell, one of the firm’s ex-EVPs, and Christina Fillhart, a Wedbush market access division Sr. VP, are to blame for causing the market access violations.
Meantime, the SEC is also accusing brokerage firm LiquidNet of regulatory violations. The regulator claims that the firm, which runs a dark pool alternative trading system, improperly used the confidential trading data of subscribers to market its services.
ATSs must set up and enforce procedures and systems to safeguard its subscribers confidential information. This includes only allowing employees who run the ATS or have a direct compliance role to access this data.
However, an SEC probe found that for almost three years, Liquidnet violated the regulatory duties and commitments that it made to its ATS subscribers when it improperly let a business unit that wasn’t part of the dark pool operation have access to that confidential trading information. These employees then used the data during marketing presentations and when communicating with other customers. The data was also used by the firm to design two ATS sales tools. Liquidnet will pay $2 million to settle the SEC charges.
The SEC has said it is cracking down on dark pools. Commission Chair Mary Jo White announced this week that there is a regulatory proposal in the works to require dark pools and other alternative trading venues to be more transparent with regulators and the public about the way they do business.
Meantime, the Financial Industry Regulatory Authority is now making dark pool data about the activity levels in each alternative trading system available to the public on its website. The SRO says the information is part of its efforts to improve market transparency and strengthen investor confidence.
The SSEK Partners Group is a securities fraud law firm.
SEC Order (PDF)
Dark Pool Operator Liquidnet to Pay $2 Million to Settle SEC Charges, The Wall Street Journal, June 6, 2014
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