The U.S. Securities and Exchange Commission has (SEC) charged high-frequency prop trading (HFT) firm Latour Trading LLC with violating trading rules, which resulted in several million “non-compliant” orders being sent to U.S. exchanges on a four year period, the SEC announced on Wednesday.
Latour agreed to settle the changes, without admitting or denying the SEC’s findings, by paying a US$5 million penalty, and more than US$3 million in disgorgement, which represents gross trading profits, rebates it received from exchanges, and prejudgment interest.
The violations arose because employees with the firm’s parent company, Tower Research, could change the code that ran their shared trading systems without Latour’s knowledge or approval, the SEC says. And, in June 2011, a coding change introduced an error into the shared infrastructure, resulting in millions of orders that did not comply with SEC rules. Some of these orders were executed, generating trading profits and trading fee rebates, the SEC notes. The orders also caused over one million trade-throughs, and 1.7 million “locked and crossed” markets, the SEC reports.
After learning of the error, Latour corrected it, the SEC says. However, the regulator found that Latour lacked “direct and exclusive control” over its financial and regulatory risk management controls as required by SEC rules; and, that the firm did not have adequate post-trade surveillance tools to detect its non-compliant trades.
“Automated trading systems can pose significant risks to the market and must be designed and implemented correctly,” said Andrew Ceresney, director of the SEC’s enforcement division, in a statement. “Firms that do not have control over their trading systems can undermine the integrity of our markets by sending millions of orders that violate SEC and stock exchange rules that promote fair and orderly trading, like Latour did in this case.”