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Getco Fined $450,000 for Failing to Supervise Equity Trading

Regulators fined the market-making unit of automated trading firm Getco LLC $450,000 for failing to maintain proper supervision over its stock buying and selling.

Nasdaq OMX Group Inc. (NDAQ) said Octeg LLC, the unit of Chicago- based Getco that engages in equities market making, violated its rules during the review period, which ran from May 7, 2010, through December 2011, according to a document dated March 8 on Nasdaq’s website. Financial Industry Regulatory Authority conducted the examination. In settling with regulators, Getco didn’t admit or deny doing anything wrong.

“The firm failed to establish and maintain a reasonable supervisory system, including but not limited to its written supervisory procedures and supervisory and operational risk control systems related to the oversight of high-frequency trading and algorithmic trading,” according to the document.

Getco, a high-frequency-trading specialist founded in 1999, provides bids and offers on more than 50 exchanges and venues globally and is “consistently” among the top five trading firms by volume on bourses including the New York Stock Exchange, NYSE Arca, the Chicago Mercantile Exchange, Eurex in Frankfurt and other markets, according to the company.

‘No Harm’

“We are pleased to have resolved this matter,” Getco said in a statement. “While there was no harm caused to the market or to any participants, we are always looking for ways to further enhance our policies, procedures and controls.”

Octeg agreed to hire an independent consultant to review the company’s supervisory procedures and risk controls for the operation of its algorithms, or trading strategies. That includes the “creation, modification, usage and testing of trading algorithms” and the company’s oversight of its trading message traffic, wash sales and “other potentially improper trading activity,” according to the document on Nasdaq’s site.

Getco’s ranking among the biggest providers of liquidity, or bids and offers, on Nasdaq has fallen since May 2010, data compiled by the exchange show. While it was the largest supplier that month for shares listed on Nasdaq and NYSE, Getco hasn’t been among the 10 biggest brokers since June 2010.

The company became a New York Stock Exchange designated market maker after buying the right to handle 350 stocks from London-based Barclays Plc in February 2010. DMMs manage the auctions at the start and end of each day for NYSE securities and provide continuous bids and offers. Getco agreed to buy Bank of America Corp.’s NYSE market-making business last November, vaulting it to second place based on the number of securities it oversees at the world’s largest bourse.

May 2010 Crash

The start date for Finra’s review was a day after the May 6, 2010, plunge known as the flash crash, which erased $862 billion from U.S. equities in less than 20 minutes. Regulators have increased their scrutiny of automated trading strategies and related practices since that market disruption.

Daniel Hawke, head of the U.S. Securities and Exchange Commission’s market-abuse unit, said at a conference last month that the regulator is examining trading practices that gained sway over the past decade amid a shift to automation and faster executions. These include the number of canceled orders relative to completed trades by individual firms, since a high daily ratio may increase the amount of data that must be processed by traders and investment firms, he said.

Nasdaq OMX and Direct Edge Holdings LLC, an exchange operator in Jersey City, New Jersey, said on March 7 they planned to penalize trading firms in an attempt to reduce the number of orders they process on their systems relative to transactions. Nasdaq’s new messaging policy will go into effect on June 1 and Direct Edge’s plans will be implemented on May 1.

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

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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