The U.S. Securities and Exchange Commission cited Wedbush Securities Inc. and Liquidnet Holdings Inc. for violations of stock market rules, taking tangible steps a day after Chairman Mary Jo White outlined her plan to improve Wall Street trading.
Wedbush, which the SEC said is among the five biggest Nasdaq Stock Market traders, failed to vet clients who broke the law as they placed billions of dollars of transactions in the stock market, the regulator said. Two current and former Wedbush executives, Jeffrey Bell and Christina Fillhart, were also targeted in the complaint.
Liquidnet, one of the biggest independent dark pool operators, agreed to pay a $2 million fine for not living up to client secrecy standards on its private trading platform.
The actions followed White’s disclosure yesterday of a plan to reshape U.S. stock trading regulation, including initiatives to boost oversight of high-frequency traders and the transparency of dark pools. The regulator will continue to face pressure to clamp down on bad behavior because of a public perception, reinforced by Michael Lewis’s “Flash Boys,” that the stock market isn’t fair, said James D. Cox, a law professor at Duke University in Durham, North Carolina.
“It’s interesting that these cases came out today, given that the SEC chair rolled out new recommendations for HFT and dark pools just yesterday,” Cox said during an interview. “The timing should give the commission some political points.”
Wedbush allowed outside firms to directly trade on exchanges with lax oversight, according to the SEC.
From July 2011 until at least January 2013, Los Angeles-based Wedbush allowed dozens of firms with thousands of traders to place transactions “that did not flow through any Wedbush systems before reaching exchanges and other trading venues in the U.S.,” according to the complaint. If true, that would be a violation of rules that require broker-dealers such as Wedbush to monitor their clients’ buying and selling.
Andrew Ceresney, the SEC’s enforcement director, said today that Wedbush clients engaged in a variety of illegal behavior, including wash trades and violations of short-selling rules. The traders were based both inside and outside the U.S., he said.
“Wedbush failed to adopt and implement risk management controls that were reasonably designed to ensure compliance with applicable regulatory requirements -- such as those for preventing naked short sales, wash trades, manipulative layering and money laundering,” according to the SEC.
“Wedbush allowed thousands of essentially anonymous foreign traders to send orders directly to U.S. trading venues to trade billions of shares every month,” the regulator said.
Wash trades involve one trader handling both sides of a single transaction, simultaneously buying and selling a stock with the possible goal of driving prices in a direction he or she deems favorable. Naked short sales involve failing to first borrow shares before selling a stock short, which is against the law.
In a statement, Wedbush said it “respectfully disagrees with the assertion in the SEC’s administrative complaint that the firm’s controls and procedures in this area were inadequate.” Wedbush added: “The firm has a strong record of supporting clear and effective regulation in this area.”
A call to Fillhart for comment wasn’t immediately returned. Bell “vigorously denies the allegations against him and looks forward to defending himself at the hearing,” his attorney, Steve Young, said in an e-mailed statement.
In the separate case against Liquidnet, the New York-based brokerage agreed to the $2 million settlement after the SEC found it didn’t maintain a firewall keeping employees of one business from accessing client information in another. Liquidnet neither admitted nor denied guilt in the infractions, which occurred from 2009 to 2011. Bloomberg News previously reported the probe.
“This was a lack of oversight that we’ve now put tremendous measures in place” to prevent a recurrence, Seth Merrin, the chief executive officer of Liquidnet, said in a phone interview today. No harm was suffered by clients, he said.
One of the key features of dark pools is that they don’t identify the firms that buy and sell on their systems and give out no information about their block orders. The platforms are designed to eliminate the market impact of trading requests by keeping them out of public view until the moment a transaction is completed.
The SEC said in a statement today that its investigation found that Liquidnet broke rules from 2009 to late 2011 when it allowed another unit at the firm to have access to confidential trading data. Staff in that unit used the confidential information in marketing presentations and other customer communications, the SEC said.
“Liquidnet’s subscribers trusted and believed that the firm was safeguarding their confidential information,” Daniel Hawke, chief of the SEC’s market abuse unit, said in the statement. “Instead, the firm breached its assurances of confidentiality and anonymity to them by allowing its ECM employees to improperly access subscriber trading data.”
The amount of the settlement with the regulator reflects the “massive escalation in the overall size of penalties” as well the size of Liquidnet’s business, Merrin said.
“Two million dollars I’m not happy about paying, but relative to our business it’s de minimis,” he said.