Thursday, July 11, 2013

Regulators Impose Record Fine for Brokerage Firm's Supervisory Failures

By Tim Dulaney, PhD and Tim Husson, PhD

Yesterday evening, the Wall Street Journal reported that FINRA and several US exchanges fined the brokerage firm Newedge USA, LLC $9.5 million over alleged failures to adequately restrict automated client trading activity that "sought to manipulate U.S. markets for nearly four years."  The trading activity took place on several exchanges including NYSE Euronext, NASDAQ OMX, and BATS Global Markets according to the WSJ article.  FINRA's press release can be found here.

Newedge allegedly failed to prevent such manipulative tactics as "spoofing", "wash trades", and "marking the close".  "Wash trades" increase the trading volume of a security without the security ever actually changing hands -- that is, the buyer and the seller are, for all intents and purposes, the same.  "Marking the close" refers to behavior that attempts to manipulate the closing price of a security.  This could be profitable if, for example, performance measures are calculated based upon the closing price.

Beyond these illicit trading activities, the regulators alleged that Newedge allowed customers to circumvent short-selling rules.  According to the Wall Street Journal, "Newedge allowed some clients to operate through "by-pass" accounts, which enabled skirting of rules requiring firms to locate stock [...] before entering a short sale."

Newedge is no stranger to regulatory actions.  According to FINRA's brokercheck, the firm currently has 47 regulatory event disclosures and one arbitration disclosure (though this even was more than a decade ago).  We'll likely see more fines of this type as regulators crack down on trading strategies that attempt to manipulate the market.

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