One of the biggest providers of direct market access in the U.S., Los Angeles-based Wedbush Securities Inc., is facing allegations that inadequate risk controls allowed some of its customers to carry out dubious trading activity.
The allegations, which were brought Monday by the Financial Industry Regulatory Authority (FINRA), have not been proven. FINRA announced that it has filed a complaint against Los Angeles-based Wedbush Securities alleging that the firm failed to allocate sufficient resources to ensure appropriate risk management controls and supervisory systems and procedures.
“This enabled its market access customers to flood U.S. exchanges with thousands of potentially manipulative wash trades and other potentially manipulative trades, including manipulative layering and spoofing,” the regulator alleges. “Despite its obligations to monitor, review, and detect suspicious and potentially manipulative trades, Wedbush largely relied on its market access customers to self-monitor and self-report such trading without sufficient oversight and controls to detect ‘red flags’.”
FINRA also alleges that despite receiving notice of regulatory and compliance risks associated with its market access business, including industry-wide notices, disciplinary decisions against other firms, and multiple inquiries and examinations by the self-regulatory organization, “Wedbush’s regulatory risk management controls and supervisory procedures were not reasonably designed to manage such risks, and, in fact, created incentives that rewarded Wedbush compliance personnel with compensation based on market access customer trading volume.”
The regulator says that, during the period of the alleged violations, Wedbush was one of the securities industry’s largest market access providers, which included overseas high-frequency, high-volume, algorithmic day-trading firms.
Additionally, the complaint alleges that the firm failed to establish, maintain and enforce adequate anti-money laundering policies and procedures, and failed to report suspicious and potentially manipulative transactions.
Earlier this year, the U.S. Securities and Exchange Commission (SEC) also brought allegations against Wedbush, claiming that it violated rules requiring firms to have adequate risk controls in place before providing customers with access to the market. Those allegations have not been proven either.
In response to those allegations, the firm issued a statement indicating that it believes that its risk management controls and procedures “were reasonably designed to achieve compliance with applicable regulatory requirements”; it also said that it, “stands behind its compliance and risk management record in its sponsored and direct market access business. The firm has a strong record of supporting clear and effective regulation in this area.” It has yet to issue a response to the allegations from FINRA.
The issuance of a disciplinary complaint represents the start of a formal enforcement proceeding. Under FINRA rules, the target of a complaint can file a response and request a hearing before a FINRA disciplinary panel.