In a disciplinary proceeding initiated by the Financial Industry Regulatory Authority (FINRA), New York Stock Exchange, the four Bats Exchanges, Nasdaq and the International Securities Exchange announced today that the exchanges are collectively charging Lek Securities Corporation and its CEO with aiding and abetting manipulative trading by one of its customers.
LSC is a small broker-dealer that primarily provides trade execution and clearing services to introducing broker-dealers and institutional clients. It basically offers automated access to the securities markets to clients who engage in high-volume, high-frequency trading.
As a result of the investigation, the exchanges found that at various times during the period from October 2010 through June 2015 the firm’s controls for preventing the entry of non-bona fide limit orders were not adequate. This violated the SEC’s market access rule, Rule 15c3-5, which requires, among other things, that broker-dealers who provide customers with access to the markets implement risk management controls reasonably designed to prevent the entry of false orders that might otherwise affect the broker-dealer’s financial condition, other market participants, or the integrity of the markets.
What Lies Ahead for a British Fintech Industry Outside the EUGo to article >>
In addition, the firm is charged with violating ‘know-your-customer’ rules, the preservation and supervision of electronic communications, the maintenance of CRD information, supervision of employees outside business activities, payments to individuals not associated with a broker-dealer, and failing to fully and timely comply with information requests from FINRA in connection with the investigation.
Aiding and Abetting Market Manipulation
More specifically, Wall Street’s industry-funded watchdog is concerned that LSC’s client, known as ‘Avalon’, engaged in practices known as ‘spoofing’ and ‘layering’, in which one or more traders move the price of a security by placing bogus orders and then modifying or cancelling them so that they never become actual trades. Once there is an appearance of interest in the security, the trader can then buy or sell on the other side at better prices.
In concluding the filing, Finra said that the issuance of this complaint represents the initiation of a formal proceeding and does not represent a decision as to any of the allegations contained in the complaint. Under current rules, FINRA can initiate temporary cease-and-desist orders to alleged manipulators but they only remain in effect until the underlying disciplinary proceedings have concluded.
“Under FINRA and Exchange rules, a firm or individual named in a complaint can file a response and request a hearing before a disciplinary panel. Possible remedies include a fine, censure, suspension or bar from the securities industry, disgorgement of gains associated with the violations and payment of restitution,” it added.