Four broker-dealers agreed to pay an aggregate fine of US $4.75 million to resolve charges brought by the Financial Industry Regulatory Authority and various securities exchanges for violating the Securities and Exchange Commission’s market access rule (Click here to access SEC Rule 15c3-5.) According to FINRA and the exchanges, the firms failed to comply with one or more provisions of Reg MAR, including not implementing controls to prevent the entry of mistaken or duplicate orders, orders that were in excess of pre-set credit or capital limits or orders that might constitute potentially violative or manipulative orders. The four broker-dealers and the amounts of their fines were: Deutsche Bank Securities Inc. (US $2.5 million); Citigroup Global Markets Inc. (US $1 million); JP Morgan Securities LLC (US $800,000); and Interactive Brokers LLC (US $450,000).
Compliance Weeds: Reg MAR generally requires brokers and dealers with access (or providing access) to trade securities directly on an exchange or alternative trading system to have procedures and processes and controls that limit their financial exposure as a result of such access, and ensure compliance with all applicable regulatory requirements. In April 2014, the Securities and Exchange Commission’s Division of Trading and Markets issued helpful answers to frequently asked questions related to Regulation MAR (click here to access). In its Q&As, the SEC provides a concise summary of the relevant regulation as well as answers to 19 questions regarding it. The SEC and FINRA have applied Reg MAR broadly. In 2015, for example, the Securities and Exchange Commission settled an enforcement action against Latour Trading LLC, a proprietary trading firm, for allegedly violating Reg MAR and other SEC rules in connection with a breakdown in its electronic trading infrastructure that resulted in approximately 12.6 million orders for over 4.6 billion shares being sent 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). The SEC claimed that Latour violated Reg MAR because it did not “appropriately” control market access so as not to jeopardize its “own financial condition, that of other market participants, the integrity of trading on the securities markets, and the stability of the financial system.” The SEC said that Latour violated Reg MAR because the developer who changed software, purportedly causing the trading infrastructure breakdown, was not under Latour’s exclusive control. Latour settled this matter by payment of a fine of more than US $8 million. (Click here for background on this matter in the article “Proprietary Trading Firm Agrees to Pay More Than US $8 Million to SEC to Resolve Market Access Charges Emanating From Faulty Software” in the October 4, 2015 edition of Bridging the Week.)