Cboe BZX Exchange fines Critical Trading for alleged rules violations
Critical Trading, LLC has agreed to pay a fine of $55,000 to settle with Cboe BZX Exchange, Inc.
Critical Trading neither admitted nor denied that violations of Exchange Rules or the Securities Exchange Act of 1934.
From November 2018 through February 2019, Critical Trading mismarked as long and routed to BZX 1,596 short sell orders, totaling approximately 146,836 mismarked shares. The Firm’s use of an improperly configured trading platform under evaluation by the Firm caused the mismarked orders.
For the 1,596 short sell orders that Critical Trading routed to the Exchange that were mismarked as “long,” the Firm created and maintained inaccurate order memoranda.
These acts, practices and conduct constitute violations of BZX Rules 11.19(a), 4.1 and 3.2. and Section 17(a) of the Exchange Act and Rule 17a-3(a)(7)(i) thereunder in that the firm submitted to BZX inaccurately marked short sell orders as long and created and maintained inaccurate order memoranda as to such orders.
From April 2016 through February 2019, Critical Trading incorrectly marked and routed to BZX approximately 441,600 orders marked with the Agency capacity code, when they should have been marked with the Principal capacity code. The firm’s use of improperly configured trading platforms under evaluation by the firm caused the mismarked orders.
By incorrectly marking the orders, the firm’s books and records contained inaccurate information as to the correct capacity on each order.
These acts, practices and conduct constitute violations of BZX Rules 11.21, 4.1 and 3.2 and Section 17(a) of the Exchange Act and Rule 17a-3(a)(7)(i) thereunder in that the Firm submitted orders with an inaccurate capacity to BZX and failed to maintain accurate books and records relating to the capacity of such orders.
During the Review Period Critical Trading failed to establish, maintain, and enforce reasonably designed written supervisory procedures (WSPs) and a supervisory system that enabled it to properly supervise the activities of its Associated Persons and ensure their compliance with BZX Rules 11.19(a) and 11.21 relating to accurate order marking and trade reporting. Although Critical Trading had been evaluating trading platforms, it failed to conduct any testing to determine whether it was accurately marking sell orders and whether the correct capacity code was being entered.
Additionally, although the Firm’s WSPs did require a monthly review of whether sell orders were properly marked, they were not reasonably designed in that they did not contain any description of how to conduct the review. Further, the Firm did not have WSPs to review for the accuracy of capacity codes.
These acts, practices and conduct constitute violations of BZX Rule 5.1, in that Critical Trading’s supervision, including its WSPs, was not reasonably designed to assure compliance with BZX Rules 11.19(a) and 11.21.
Critical Trading maintained its own market access to trading on BZX.
From April 2016 through October 2019, Critical Trading failed to implement reasonably designed pre-order entry risk management controls and supervisory procedures to prevent the entry of orders that did not comply with the rules related to order marking. Specifically, the firm’s controls and procedures failed to ensure orders were marked with the correct short or long sale indicators, as required by BZX Rule 11.19(a), prior to being entered on BZX.
These acts, practices and conduct constitute violations of Exchange Act Rules 15c3-5(b) and (c)(2) and BZX Rule 3.2 in that Critical Trading failed to implement reasonably designed pre-order entry risk management controls and supervisory procedures.
On top of the fine, the firm has agreed to a censure.