Alternative trading system company Liquidnet Inc. is settling allegations from the U.S. Securities and Exchange Commission (SEC) that it breached securities rules by having deficient controls.
The New York-based firm, which operates various alternative trading systems (ATSs), agreed to pay US$5 million to resolve charges that it violated U.S. federal securities laws in two areas — failing to have adequate market access controls and failing to establish sufficient policies and procedures to protect private trading information internally.
Specifically, the SEC alleged in its order that Liquidnet violated market access rules by failing to set proper credit limits on traders.
“From approximately 2019 through 2023, Liquidnet violated the market access rule by setting credit thresholds for non-broker-dealer customers without first performing adequate due diligence on their creditworthiness and frequently setting customer credit thresholds at a default of US$1 billion — regardless of the customer’s financial standing,” the SEC’s order said.
It also alleged that, between 2019 and 2024, the firm didn’t properly restrict access to confidential subscriber trading information to certain employees.
“First, Liquidnet did not have appropriate access controls for certain ATS data used by technology personnel for testing purposes. Second, Liquidnet permitted internal access to certain confidential subscriber trading information by certain employees who had no operational or compliance responsibilities for the Liquidnet ATSs,” the order said.
Liquidnet agreed to settle the charges without admitting or denying the regulator’s allegations.
In addition to the monetary penalty, the SEC noted that Liquidnet also agreed to be censured, and it said that the firm has undertaken efforts to fix the shortcomings, including retaining an outside consultant to improve its controls.
“ATS operators must have controls in place to mitigate risks associated with their systems, such as market access and the potential exposure of confidential subscriber trading information in order to protect investors,” said Joseph Sansone, chief of the SEC’s market abuse unit, in a release on Friday.