One day following the tough talk of Security and Exchange Commission (SEC) Chairwoman Mary Jo White, the agency fined a major dark pool operator for public disclosure of confidential information about exchange participants, while one of the largest trading firms on the NASDAQ OMX Group, Inc. (NASDAQ:NDAQ) was charged with a laundry list of complaints.
SEC’s $2 million fine for Liquidnet
The $2 million fine levied at Liquidnet, which trades nearly 40 million shares per day, resulted from improper release of confidential information about customers of the exchange. The SEC report on the fine indicates Liquidnet took confidential information about their customers and used it in sales presentations.
“The SEC findings were largely consistent with what we self-disclosed to clients in June 2012,” Liquidnet said in a statement to ValueWalk. “None of the shortcomings identified resulted in any Liquidnet Member or Customer being disadvantaged or otherwise harmed with respect to any Liquidnet order or trade. However, as a firm, we hold ourselves accountable. We have worked tirelessly to improve our processes, our policies, and implement global technology solutions to enhance the level of transparency and control that our Members and customers have when interacting with us.”
“Regulations require an alternative trading system (ATS) to establish and enforce safeguards and procedures to protect the confidential trading information of its subscribers,” an SEC statement said. “Among them is limiting access to subscribers’ data to employees who operate the ATS or have a direct compliance role.” It is unclear the actual extent of the market damage caused by the exchange utilizing presumed well respected clients as examples of how the exchange operates, but the SEC appeared proud of the accomplishment.
“Dark pool operators violate the law when they fail to protect the confidential trading information that their subscribers entrust to them, as Liquidnet did here when it used this confidential information to try to expand its business,” said Andrew J. Ceresney, director of the SEC Enforcement Division. “We will continue to aggressively police broker-dealers who operate an ATS and fail to rigorously ensure the protection of confidential trading information.”
The report said Liquidnet employees used the confidential information about Liquidnet’s dark pool subscribers during marketing presentations and various communications to other customers. Liquidnet also used subscribers’ confidential trading information in two ATS sales tools that it devised, but the SEC did not say the exchange illegally released information that was used to gain improper trading advantage, a more serious charge.
SEC points out individuals responsible in Wedbush incident
In perhaps a more serious issue, Los Angeles-based Wedbush Securities, among the top firms by volume on the Nasdaq exchange, was charged with providing market access rules from 2011 to 2013 that gave direct access to the exchange for their clients to send orders. The SEC charges the brokerage firm did not have “direct and exclusive control,” which points to issues where mistakes have been made by unauthorized trading that can roil markets.
Pointing the finger at individuals, the SEC said that former Wedbush Vice President Jeffrey Bell and Senior Vice President Christina Fillhart both caused the violations, according to a Reuters report. Individually identifying those responsible for criminal misbehavior is an issue addressed yesterday in ValueWalk. The SEC doing so with major Wall Street elite firms could be another issue entirely, however.