Thursday, October 01, 2015

SEC Settles Proceedings Against High Frequency Trader for Market Structure Rule Violations

By Jacquelyn Lumb

High-frequency trading firm, Latour Trading LLC, has settled SEC charges that it violated the market access rule and Regulation NMS, which resulted in its receipt of executions and exchange rebates that it should not have received and that other market participants might have received were it not for Latour’s violations. Latour, without admitting or denying the findings, agreed to pay a $5 million civil penalty and more than $3 million for the disgorgement of gross trading profits, rebates paid by the exchanges, and prejudgment interest (In the Matter of Latour Trading LLC, Release No. 34-76029, September 30, 2015).

Non-compliant orders. The SEC found that from October 2010 through August 2014, Latour sent approximately 12.6 million orders for more than 4.6 billion shares that did not comply with Regulation NMS. The firm lacked direct and exclusive control over its financial and regulatory risk management controls, as required by the market access rule, and lacked adequate post-trade surveillance tools to detect the non-compliant trades.

Coding error. Latour’s non-compliant intermarket sweep orders were largely the result of a software coding change made by its parent company in 2011 without the firm’s knowledge or approval. The coding change contained an error which affected the software that Latour used to send the orders to the market. Latour also made a number of changes to its routing logic which resulted in its sending some orders that did not comply with Regulation NMS. The firm corrected some of the problems by October 2012, but due to the lack of adequate post-trade surveillance tools, it sent additional non-compliant orders before the remaining issues were resolved in 2014.

Impact on markets. In the news release announcing the settlement, Enforcement Director Andrew Ceresney said that firms such as Latour, which do not have control over their trading systems, can undermine the integrity of the markets by sending millions of orders that violate the SEC’s and the stock exchanges’ rules that promote fair and orderly trading. Robert Cohen, the co-chief in the Division’s market abuse unit, added that market structure violations can have a real, if sometimes subtle, impact on the market. Latour’s actions allowed it to receive executions and rebates that might have gone to other market participants, he said.

The release is No. 34-76029.