The Financial Industry Regulatory Authority filed a disciplinary proceeding against Lightspeed Trading LLC, an introducing broker and member of FINRA, for allegedly failing to properly monitor and supervise the activities of its customers, as well as Richard Kenny, one of its own registered representatives, from July 2011 through November 2012. According to FINRA, the firm failed to “reasonably supervise” trading by two accounts – Fineline Trading Group LLC and Makino Capital LLC – each ultimately owned by a different brother – Behruz Afshar or Shahryar Afshar. FINRA claimed that the brothers placed one-lot orders on one side of NASDAQ PHLX LLC, an option markets, which were never intended to be executed, to alter the options series’ best bid or offer. After other traders joined the new best bid or offer, their trades would be executed against larger all or nothing (“AON”) orders the brothers had previously placed on the other side of the market. After execution of these AON orders, the brothers would usually cancel their prior one-lot orders. The brothers were able to carry out their scheme, in part, by designating one account as “customer” and the other as “professional” in order to take advantage of priority rules of the exchange (e.g., the brothers’ one-lot trades were typically placed as professional orders, thus getting lower priority for execution. This helped ensure their AON orders were not executed against their own one-lot orders). FINRA claimed that Lightspeed did not have “adequate supervisory systems” to monitor for the potentially manipulative activity and ignored various red flags that should have tipped it off to the potentially problematic activity. For example, FINRA alleged the firm did not detect that one brother’s account would enter option orders on one side of the market at the same time as the other brother’s account placed orders on the other side of the market and that one salesperson had a firm identification that permitted him to enter orders in the brothers’ accounts although his job function did not entail entering orders. Also, during the tenure of the brothers’ accounts, each account alternated designation as professional or customer, by quarter. FINRA seeks a fine and other sanctions against Lightspeed. Previously, Mr. Kenny was held liable by a FINRA hearing panel for not cooperating completely in a FINRA investigation related to this matter (click here to access decision). The Securities and Exchange Commission brought civil charges against Mr. Kenny and the two brothers and their companies related to this matter in 2014 that the individuals resolved last year by payment of aggregate sanctions of approximately US $1.9 million. (Click here to access background in the article “Spoofing Case Filed by SEC” in the December 6, 2015 edition of Bridging the Week; click here for terms of settlement.)