U.S. securities regulators have fined a brokerage firm US$9.5 million for failing to supervise clients accessing the market via direct market access (DMA), among other violations.
The Financial Industry Regulatory Authority (FINRA) and several stock exchanges — BATS Exchange, Inc., New York Stock Exchange LLC, NYSE Arca, Inc. and the NASDAQ Stock Market LLC — censured and fined Chicago-based Newedge USA, LLC $9.5 million for failing to supervise trading by clients that used DMA, or routed orders directly to markets (known as “sponsored access”); along with allegedly violating short selling rules and recordkeeping failures.
FINRA and the exchanges found that Newedge did not have sufficient procedures, adequate surveillance tools, or necessary information to monitor DMA and SA client trading. It says that these supervisory violations occurred over a four-year period, during which numerous internal documents flagged these deficiencies, but that the firm still did not take adequate steps to satisfy its supervisory obligations.
For example, FINRA found that Newedge did not have adequate procedures or controls to monitor which clients used DMA and SA to trade in the equities markets. It says that the firm failed to reasonably monitor for certain types of potentially manipulative trading, such as wash trading; that it could not adequately monitor certain clients’ trading because it did not receive any order data reporting their activity; and that it lacked essential knowledge about the beneficial owners of certain accounts directly accessing U.S. markets through its affiliates. Additionally, it says that Newedge failed to retain certain email and text message data.
This failure to supervise its DMA and SA business also impacted its ability to supervise compliance with federal securities regulations regarding short sales, FINRA says, noting that during the financial crisis in 2008, Newedge permitted its clients to submit numerous orders for short sales in securities that were prohibited by the U.S. Securities and Exchange Commission (SEC).
Newedge settled the case, neither admitting nor denying the charges, but consenting to the entry of FINRA’s findings. It also agreed to retain an independent consultant to conduct a comprehensive review of the adequacy of the firm’s policies, systems and procedures. The $9.5 million in fines, includes a $4 million fine to FINRA, $1.75 million fines to both NASDAQ and the BATS Exchange, a fine of $1.125 million to the NYSE, and an $875,000 fine to NYSE Arca.
“If a firm is going to turn a blind eye toward potentially manipulative trading unleashed upon the market by one of its customers, this case shows that there will be serious consequences,” said Thomas Gira, executive vice president of market regulation at FINRA. “It is imperative that firms giving customers access to the marketplace function as responsible gatekeepers and implement reasonable supervisory programs and procedures to monitor their customers’ trading to ensure market integrity.”