Published January 08, 2015
A brokerage firm that operates a so-called "dark pool" trading system has agreed to pay $2 million to settle federal civil charges of using customers' confidential trading data to market its services.
The settlement between Liquidnet Inc. and the Securities and Exchange Commission was announced Friday, a day after SEC Chair Mary Jo White proposed new rules that could bring closer oversight of high-speed trading and dark trading pools, which account for as much as 35 percent of trades.
Unlike public stock exchanges, dark pools are private, off-market platforms that offer limited information about participants or operations.
The SEC said that Liquidnet improperly gave access to confidential trading information to a brokerage unit outside its dark pool from 2009 to late 2011.
New York-based Liquidnet neither admitted nor denied wrongdoing under the settlement but agreed to refrain from future violations. Liquidnet also was censured, an action that brings the possibility of a stiffer sanction if the alleged violation is repeated.
In a separate case Friday, the SEC filed charges against Wedbush Securities Inc., accusing the large trading firm of providing customers access to the market without having adequate risk controls in place.
SEC Enforcement Director Andrew Ceresny said the Liquidnet and Wedbush cases send the message that the agency is seriously pursuing violations of market conduct rules.
In the Wedbush case, the SEC also charged Jeffrey Bell, a former executive vice president of the firm, and Christina Fillhart, a senior vice president. The violations began in July 2011 and continued into 2013, according to the SEC.
Los Angeles-based Wedbush disputed the SEC's allegations. "The firm believes that its risk-management controls and procedures in this area were reasonably designed to achieve compliance" with the rules and were consistent with guidance given by SEC staff, Wedbush said in a statement.
"We are disappointed that the SEC has decided to bring charges against the firm and individuals in this instance, and look forward to a prompt and fair resolution of the matter," it said.
Wedbush is one of the five biggest firms by trading volume on the Nasdaq market, according to the SEC. The agency said Wedbush failed to restrict trading access to clients which it preapproved, as required by the rules, and failed to properly review its risk management processes.
The lapses meant that traders, including thousands of foreign traders, were allowed access to U.S. markets without being vetted to ensure they complied with U.S. laws, the SEC said.
"We will hold Wedbush accountable for reaping substantial profits while failing to protect U.S. markets from the risks posed by these traders," Ceresney said in a statement.
Attorneys for Fillhart and Bell didn't immediately return telephone calls and messages seeking comment.