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Last Updated: Mar 5, 2009 - 10:40:54 AM |
The Securities and Exchange Commission today brought enforcement
actions against 14 specialist firms for unlawful proprietary trading on
several regional and options exchanges. The firms agreed to settle the
SEC's charges by collectively paying nearly $70 million in disgorgement
and penalties.
The SEC charged the specialist firms for violating their fundamental
obligation to serve public customer orders over their own proprietary
interests by "trading ahead" of customer orders, or "interpositioning"
the firms' proprietary accounts between customer orders.
"These firms violated the public trust by abusing the privileged
position they had as specialists on the various exchanges," said James
Clarkson, Acting Director of the SEC's New York Regional Office.
"Today's enforcement action demonstrates that the SEC has no tolerance
for unscrupulous trading practices, and will work vigorously to protect
investors from improper trading conduct."
David Rosenfeld, Associate Director of the SEC's New York Regional
Office, added, "Specialists who engage in unlawful proprietary trading
hurt the investing public and undermine confidence in the fairness of
our capital markets. We will aggressively pursue market professionals
who engage in improper trading and hold them accountable for their
actions."
The SEC's investigation into the improper trading began with a referral
from the SEC's Office of Compliance Inspections and Examinations
(OCIE). Lori Richards, Director of OCIE, said, "The SEC expects strict
compliance with the trading rules governing market participants."
The Commission instituted settled administrative and cease-and-desist
proceedings against eight specialist firms: Botta Capital Management
L.L.C.; Equitec Proprietary Markets LLC; Group One Trading L.P.; Knight
Financial Products LLC; Goldman Sachs Execution & Clearing L.P.;
SLK-Hull Derivatives LLC; Susquehanna Investment Group; and TD Options
LLC. According to the SEC's order, the firms engaged in improper
proprietary trading on the American Stock Exchange, the Chicago Board
Options Exchange, and the Philadelphia Stock Exchange.
Administrative Orders
* Order in the Matter of Botta Capital Management, L.L.C.
* Order in the Matter of Equitec Proprietary Markets, LLC
* Order in the Matter of Group One Trading, L.P.
* Order in the Matter of Knight Financial Products, LLC
* Order in the Matter of Goldman Sachs Execution & Clearing
L.P. and SLK-Hull Derivatives LLC
* Order in the Matter of Susquehanna Investment Group
* Order in the Matter of TD Options LLC
The Commission also filed settled civil injunctive actions in the U.S.
District Court for the Southern District of New York against six
specialist firms: Automated Trading Desk Specialists LLC; E*Trade
Capital Markets LLC; Melvin Securities LLC; Melvin & Company LLC;
Sydan LP; and TradeLink LLC. According to the SEC's complaints, these
firms engaged in improper proprietary trading on the Chicago Stock
Exchange.
SEC Complaints
* SEC Complaint v. Automated Trading Desk Specialists, LLC
* SEC Complaint v. E*Trade Capital Markets LLC
* SEC Complaint v. Melvin Securities, LLC and Melvin & Company,
LLC
* SEC Complaint v. Sydan, LP
* SEC Complaint v. TradeLink, LLC
According to the SEC's orders and complaints, from 1999 through 2005,
the firms violated their basic obligation as specialists to serve
public customer orders over their own proprietary interests. As
specialist member firms on one or more of the regional and options
exchanges, the firms had a duty to match executable public customer or
"agency" buy and sell orders and not to fill customer orders through
trades from the firm's own accounts when those customer orders could be
matched with other customer orders. However, the firms violated this
obligation by filling orders through proprietary trades rather than
through other customer orders, thereby causing millions of dollars of
customer harm.
According to the SEC, the improper proprietary trading took three basic
forms: trading ahead, interpositioning, and trading ahead of unexecuted
open or cancelled orders. In certain instances, specialists filled one
agency order through a proprietary trade for their firm's account while
a matchable agency order was present on the opposite side of the
market, thereby improperly "trading ahead" of such opposite-side
executable agency order. The customer order that was traded ahead of
was then disadvantaged when it was subsequently executed at a price
that was inferior to the price received by the firm's proprietary
account. In some instances, after trading ahead, specialists also
traded proprietarily with the matchable opposite-side agency order that
had been traded ahead of, thereby interpositioning themselves between
the two agency orders that should have been paired off in the first
instance. By participating on both sides of trades, the specialist
captured the spread between the purchase and sale prices, thereby
disadvantaging the other parties to the transactions. In some
instances, after the specialists traded ahead, the opposite-side
executable agency orders were left open until the end of the trading
day, or were cancelled by the customer prior to the close of the
trading day before receiving an execution.
In the orders against eight firms, the Commission found that by
engaging in unlawful proprietary trading, the firms each violated
Section 11(b) of the Securities Exchange Act of 1934 and Rule 11b-1
thereunder, as well as various rules in effect on each of the
exchanges. The Commission ordered those firms to pay, in the aggregate,
more than $22.7 million in disgorgement and more than $4.3 million in
penalties. The Commission also ordered the firms to cease-and-desist
from future violations, and censured each of the firms. The firms
consented to the entry of the orders without admitting or denying the
findings.
In its complaints filed against six firms, brought pursuant to Section
21(d) and (e) of the Exchange Act, the SEC alleges that by engaging in
unlawful proprietary trading, each of the firms violated Chicago Stock
Exchange Article 9, Rule 17. The complaints also allege that each of
those firms failed to make or keep current records pertaining to
certain types of orders, in violation of Section 17(a) of the Exchange
Act and Rule 17a-3(a)(1) thereunder. Those firms have agreed to settle
the SEC's charges by consenting to the entry of judgments enjoining
them from future violations of the above provisions, and ordering them
to pay, in the aggregate, more than $35.7 million in disgorgement and
more than $6.7 million in penalties. The consent judgments are subject
to approval by the court.
The SEC acknowledges the assistance and cooperation of the Financial
Industry Regulatory Authority, the American Stock Exchange, the Chicago
Board Options Exchange, the Chicago Stock Exchange, and the
Philadelphia Stock Exchange.
The SEC's investigation is continuing.
Source:Ocnus.net 2009
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