The U.S. Financial Industry Regulatory Authority (FINRA) and Nasdaq Stock Market LLC on Monday sanctioned and fined Wedbush Securities Inc. US$675,000 for supervisory failures that allowed a brokerage firm client to employ a trading strategy involving leveraged exchange-traded funds (ETFs) that led to chronic delivery failures.
The violations in connection with Wedbush’s work as the clearing firm for broker-dealer Scout Trading, LLC.
The regulators says that Scout Trading routinely submitted “naked” redemption orders to Wedbush, and engaged in short selling that resulted in “repeated fails to deliver by Wedbush.”
The regulators say that Wedbush repeatedly carried out the trading orders without first determining whether Scout Trading had enough shares to redeem. And they alleged that the firm didn’t take adequate follow-up actions to address the repeated fails to deliver. In settling the allegations, Wedbush neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
Scout Trading settled its own charges with Nasdaq in 2015, in which it consented, without admitting or denying the charges, to findings by Nasdaq that it violated trading rules. That settlement resulted in a censure and US$3 million fine against the firm.
“Timely delivery of securities is a critical component of sales activity in the markets, particularly in ETFs that rely on the creation and redemption process. Naked trading strategies that result in a pattern of systemic and recurring fails flout such principle and do not comply with [short selling rules],” says Thomas Gira, executive vice president and head of market regulation at FINRA. “Authorized participants and their broker-dealer clients need to have adequate supervisory procedures and controls in place to ensure that they are properly redeeming and creating shares of ETFs.”