• Mislabled orders got higher priority at exchanges, SEC says
  • Regulators also allege spoofing scheme that won rebates

Three Chicago-based options traders were accused of fraud by the U.S. Securities and Exchange Commission, which alleged they used a manipulative trading technique called spoofing and cheated exchanges.

Through their alleged scheme, twin brothers Behruz Afshar and Shahryar Afshar and their friend and former broker Richard Kenny labeled their orders to get them executed faster and also so they’d generate higher rebates and lower fees than they should have, the SEC said in a statement Thursday. Their spoofed orders helped them pocket exchange rebates, according to the SEC.

“This alleged scheme deceived the options exchanges, disadvantaged other market participants, and undermined the fair operation of the U.S. securities markets,” Andrew Ceresney, director of the SEC enforcement division, said in the statement. 

Spoofing was catapulted into headlines this year as regulators cracked down on the practice. The U.S. government indicted Navinder Sarao for years of alleged spoofing that contributed to the May 2010 market meltdown called the Flash Crash. Michael Coscia was convicted in Chicago for using the technique.

The SEC said that a hearing on the matter will be scheduled before an administrative law judge. A date for the hearing wasn’t disclosed.

Howard Stein, an attorney for Kenny, declined to comment. A voicemail left for Gerald Miller, an attorney for the Afshar brothers, wasn’t immediately returned.

The SEC alleged that the traders violated options exchange rules that require orders to be marked as coming from either professionals or customers. They improperly labeled their trades as customer orders, getting them execution priority and making them eligible for higher trading rebates and lower fees, the SEC said.

“The issue of professional traders posing as customers has been a huge frustration for market makers for ages,” Remco Lenterman, a former manager director at automated trading firm IMC, wrote on Twitter after the SEC’s case was announced.

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