Latour Trading LLC, a Securities and Exchange Commission-registered broker-dealer and proprietary trading firm, agreed to pay more than US $8 million to the SEC to resolve charges related to an alleged breakdown in controls in its electronic trading infrastructure.
According to the SEC, from October 2010 through August 2014 Latour sent approximately 12.6 million orders for over 4.6 billion shares to stock exchanges that did not comply with requirements of the SEC aimed to help ensure competition among US securities markets and fair prices – “Regulation NMS” (National Market System).
Among other things, Regulation NMS prohibits most so-called “trade-throughs” – namely, execution of an order on one trading venue at a price that is inferior to the best bid or offered price displayed by any national securities exchange or national securities association. There are certain types of orders that are exempted from this prohibition – such as so-called “intermarket sweep orders” –but they must comply with express requirements.
(ISOs are typically large quantity limit orders that are sent to multiple exchanges at the same time. To be exempt from the trade-through prohibition, the relevant limit order likely to be filled at an inferior price must be identified as an ISO and one or more additional limit orders, as necessary, must be routed to execute against all best bids and offers at other trading centers up to their displayed size.)
In this matter, the SEC charged that, because of a programming change made to software used both by Latour and its ultimate parent company, Tower Research Capital LLC, ISOs sent by Latour did not comply with some of the express requirements for the exemption.
As a result, Latour’s ISOs caused in excess of 1.1 million trade-throughs and 1.7 million locked or crossed markets (where the national best bid equaled the national best offer), alleged the SEC. According to the SEC, Latour realized over $2.7 million in gross trading profits and exchange rebates because of these trades.
The SEC also charged Latour with violating an SEC rule that requires broker-dealers to “appropriately” control market access so as not to jeopardize “their own financial condition, that of other market participants, the integrity of trading on the securities markets, and the stability of the financial system.” This rule is known as Regulation MAR (Market Access Regulation). The SEC said that Latour violated this rule because the developer who changed software for both its parent company and itself was not under Latour’s exclusive control.
Finally, the SEC also claimed that Latour’s post-trade surveillance tools were inadequate – which is why it did not timely detect the programming error.
To resolve this matter, Latour agreed to remit the amount of its gross trading profits and pre-judgment interest, and pay a fine US $5 million. The SEC acknowledged Latour’s “remedial acts” and cooperation with SEC staff in agreeing to the settlement.
Compliance Weeds: All companies should have written robust change management procedures that govern software changes. These procedures should require pro-active consideration of all possible impacts of proposed software changes – not only by the relevant programmer but by a supervisor; testing (in a test environment); and, after roll-out, monitoring of key data points to ensure there are no material deviations from expected results in order to detect possible unintended consequences. For each change to software, these steps should be memorialized in writing.