Trillium Brokerage Fined $1 Million by Finra Over Illegal Trading Strategy

Trillium Brokerage Services LLC, a proprietary trading firm, was fined $1 million for sending orders to electronic stock venues aimed at deceiving investors, the Financial Industry Regulatory Authority said.

Nine traders at New York-based Trillium entered orders on the Nasdaq Stock Market and NYSE Arca designed to create the false appearance of buying or selling in an attempt to get better prices than they would have otherwise, Finra said in a statement on Business Wire. The 46,000 instances generated about $575,000 in profit and took place between Nov. 1, 2006, and Jan. 31, 2007, the regulator said.

The case highlights the challenge regulators face in differentiating between legitimate high-speed trading strategies and efforts to manipulate the market using fast, computer-driven tactics. About 60 percent of U.S. stock trading comes from firms that rely on fast executions to earn profits, according to New York-based research firm Tabb Group LLC.

“A legitimate high-frequency firm is really just trying to capitalize on its speed advantage for better pricing” in a process akin to traditional market making, said Adam Honore, Denver-based research director at Aite Group LLC. “What these guys did was kind of an electronic version of a pump and dump where people get e-mails, ‘Buy this great security.’ They would issue a bunch of orders meant to fake interest in the security and then cancel them all.”

No Comment

A woman who answered the telephone at Trillium’s New York office said the firm wasn’t commenting. She wouldn’t give her name.

Finra fined the nine traders and two executives $802,500 and required them to return profits of $292,000. Daniel Balber, director of trading at Trillium, and trader John Raffaele were fined $200,000 and $220,000, respectively, and given two-year suspensions. Chief Compliance Officer Rosemarie Johnson was fined $50,000 and suspended for a year.

The regulator also required Trillium to return profits of $173,000. Sanctions against the firm and 11 of its employees totaled $2.26 million.

“Trillium’s trading conduct was designed to improperly bait unsuspecting market participants into executing trades at illegitimately high or low prices for the advantage of Trillium’s traders,” Thomas Gira, executive vice president for market regulation at Finra, said in the statement.

‘Repeated Pattern’

Trillium engaged in a “repeated pattern of layering conduct to take advantage of trading, including algorithmic trading by other firms,” Finra said. The company did this by submitting bids or offers designed to induce other traders to raise or lower prices and then executing trades on the opposite side of the market at better levels than would otherwise have been available, according to the regulator.

Finra fined Trillium $15,000 in June 2007 for failing to observe rules requiring it to ascertain that shares could be borrowed to support short sales. Short sales are used to profit from stock price declines or hedge trading activity. A year earlier NASD, the predecessor of Finra, fined Trillium and eight traders more than $225,000 for another strategy that involved the publication of non-bona fide quotations meant to enrich the firm. That trading occurred in Nasdaq’s opening trading session.

“Finra will continue to aggressively pursue disciplinary action for illegal conduct, including abusive momentum ignition strategies and high-frequency trading activity that inappropriately undermines legitimate trading activity, in addition to related supervisory failures,” Gira said today.

To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net.

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