TD Securities (USA) LLC is being sanctioned by U.S. authorities for failing to properly oversee a trader that allegedly engaged in manipulative trading by repeatedly entering spoofing orders.
In a series of settlements with the U.S. Securities and Exchange Commission (SEC), the U.S. Financial Industry Regulatory Authority (FINRA) and the U.S. Department of Justice (DoJ), the firm resolved allegations that it failed to properly oversee the former head of its U.S. Treasuries desk, who allegedly engaged in manipulative trading to benefit the firm.
According to the SEC’s order, between April 2018 and May 2019, the former trader spoofed the U.S. Treasury market by entering orders that he had no intention of executing in an effort to obtain better prices on genuine orders that he entered simultaneously on the other side of the market. After the legitimate orders were filled, the phoney orders were then immediately cancelled.
“To mask his true intentions, the trader employed so-called ‘iceberg’ orders, which hid from the market the true size of the bona fide orders,” the SEC’s order said.
The SEC found that TD Securities benefited from the improper trading, generating at least US$400,000 in profits, that the firm lacked adequate internal controls, and that it failed to scrutinize the trader after receiving both internal and external warnings of potentially irregular trading activity.
In the settlement with the SEC, the firm was ordered to disgorge US$400,000, to pay a US$6.5-million penalty, along with about US$135,000 in interest, and to cease and desist from further violations.
Separately, TD Securities was ordered to pay a US$6-million fine to FINRA. It also entered into a deferred prosecution agreement (DPA) with the DoJ to resolve criminal charges, in connection with a criminal information filed Monday in the District of New Jersey charging the company with one count of wire fraud.
Under the terms of the DPA, TD Securities will pay more than US$15.5 million in monetary sanctions, including a US$9.4-million fine and approximately US$4.7 million in victim compensation, along with forfeiture, the DoJ said.
Last year, the former trader was indicted on two counts of wire fraud, seven counts of securities fraud, and seven counts of securities manipulation in connection with the scheme. He is awaiting trial and the allegations against him have not been proven.
In mid-2019, the firm terminated the trader after concluding that he had violated its compliance policies by spoofing. It also developed an in-house spoofing surveillance model for the U.S. Treasuries desk, implemented a third-party trading surveillance system, and conducted additional training related to spoofing, the SEC’s order said.
“Manipulative and deceptive trading undermines the integrity of our markets,” said Mark Cave, associate director in the SEC’s enforcement division, in a release Monday. “Broker-dealers and other firms cannot ignore their employees’ manipulative conduct and must take meaningful steps to detect and prevent it.”