FINRA fines Sagetrader for failure to reasonably supervise for potentially manipulative trading
Sagetrader, LLC has agreed to pay a $775,000 fine as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
From 2013 through 2019, Sagetrader failed to reasonably supervise for potentially manipulative trading on its platforms.
In particular, from 2013 through 2017, Sagetrader onboarded an increasing number of customers, which caused a corresponding increase in trading activity through the firm. Trading on the firm’s platform increased from more than 67 million orders per year in 2015 to more than 200 million orders per year in 2017. The number of shares traded by the Firm’s customers increased from roughly 3.7 billion shares per year in 2015 to more than 18.9 billion shares per year in 2017.
The trading activity conducted by some of these customers generated “red flags” for potentially manipulative trading. More specifically, after the firm implemented its automated surveillance system in 2015, its customers’ trading generated hundreds of thousands of internal surveillance alerts for potentially manipulative trading. More than 70% of those internal alerts were generated by four firm customers that each included hundreds of foreign-based day traders.
Sagetrader classified two of these customers as “high risk.” One of these high-risk customers generated more than 197,000 internal surveillance alerts for potentially manipulative trading from March 2016 until mid-May 2018, when it stopped using the firm for routing and execution services. The other high-risk customer generated more than 55,000 alerts between March 2016 and October 2016, when Sagetrader terminated the customer’s account because the firm’s executing broker would not accept the customer’s order flow.
Also, Sagetrader’s supervisory system, including WSPs, for potential manipulative trading on its platforms was not reasonable in several respects.
First, prior to 2015, Sagetrader did not conduct any supervisory reviews for potentially manipulative trading, such as layering, spoofing, wash trades, or marking the close or open.
Second, in 2015, Sagetrader implemented an automated surveillance system that generated post-trade alerts for potential spoofing, layering, wash trades, and marking the close but that system did not surveil for marking the open until October 2018. Also, from May 2016 through September 2016, due to a coding error, the system did not capture the trading activity of approximately 70 individual traders of one of the Firm’s high-risk customers.
Third, Sagetrader’s review of the alerts was not reasonable from 2015 through 2019. For example, the Firm had limited staff and other resources to sufficiently conduct the initial review and analysis of the alerts, which, by 2018, totaled more than 500,000 alerts per year.
Further, the firm’s first-level reviewers were permitted to close surveillance alerts for potentially manipulative trading without any oversight or supervision by a firm principal. One of these assigned reviewers, who was responsible for reviewing approximately 75 percent of Sagetrader’s alerts through June 2018, and 100 percent of the alerts thereafter, did not have sufficient experience or training in identifying potentially manipulative trading when he was hired.
Fourth, Sagetrader’s WSPs failed to provide reasonable guidance on how to review for potentially manipulative trading. Prior to September 2016, the firm’s WSPs required reviewers to escalate “significant” alerts to an alert review committee. The firm’s procedures, however, did not explain what qualified as a “significant” alert. Nor was it clear what additional steps the reviewers should take when reviewing alerts.
By September 2016, the firm’s WSPs directed reviewers to seek customer explanations for alerts “of concern.” Based on their analysis, the reviewers could close the alert if it did not “appear to be egregious,” but were supposed to escalate “significant alerts” to the alert review committee. There was still no guidance as to what constituted a “significant” alert that required escalation. Nor was there any guidance as to what rendered alerts “of concern” or how to determine whether an alert appeared to be egregious.
Fifth, the firm’s supervisory system was unreasonable, because while the firm focused on resolving individual alerts generated by each separate trader at each customer, and terminated some individual traders, the firm did not have a system in place to consider the total alerts generated by multiple traders at the same customer in order to evaluate the aggregate regulatory risk presented by a customer’s overall trading activity.
Sixth, Sagetrader identified two customers as “high risk,” which, according to the firm, required “enhanced” surveillance. But the firm had no system or procedures for conducting “enhanced” surveillance and, in fact, did not do so.
Finally, Sagetrader did not routinely document the alert reviews it conducted, and for the alert reviews that it did document, the documentation was not always sufficient.
Therefore, Sagetrader violated NASD Rules 3010 and FINRA Rules 3110 and 2010.
On top of the $775,000 fine, Sagetrader has agreed to a censure. The firm also consents to an undertaking to review and revise its supervisory system, including its WSPs, with respect to the findings described above concerning the firm’s supervision for potentially manipulative trading by customers.