FINRA fines Wedbush Securities for deficient review of customers’ trading activities
Wedbush Securities Inc has agreed to pay a fine as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
From June 2015 through the present date, Wedbush has provided certain customers with access to third-party electronic trading platforms (electronic trading customers), which allows these customers to enter orders for execution using one of the firm’s market participant identifiers (MPIDs). Wedbush separately executed transactions for its proprietary traders and other customers through its own internal trading systems.
For various reasons, Wedbush stopped providing market access services to its customers in June 2015. However, the firm still provided certain electronic trading customers with access to third-party electronic trading platforms, which routed these customers’ orders to other broker-dealers for execution.
Wedbush mistakenly believed that it was not required to review this trading for any type of potentially manipulative activity since it was no longer providing market access. Instead, the firm believed that the obligation to review this trading for potentially manipulative activities rested solely with the executing broker-dealers. Thus, since June 2015, the firm did not conduct any supervisory reviews of the trading activities by its electronic trading customers for potentially manipulative trading, such as layering, spoofing, wash sales, or marking the close or open.
As a result, Wedbush failed to detect potential layering activity in February and March 2017 by an institutional electronic trading customer, which was comprised of hundreds of foreign day traders. During those two months, FINRA surveillance identified approximately 2,900 layering exceptions involving over 130 different stock symbols associated with the customer’s order flow. On March 13, 2017, the executing broker- dealer for that order flow detected the potential layering, provided notice of the potential layering to Wedbush, and stopped accepting orders from the customer.
Upon receiving notice of the potential layering activity from the executing broker-dealer, Wedbush closed the electronic trading customer’s account. Wedbush, however, did not take any steps to detect and prevent other electronic trading customers from engaging in potentially manipulative trading, or to implement any type of supervisory reviews for potentially manipulative trading.
As a result, from June 2015 through the present, approximately 90 electronic trading customers effected more than 3.4 million transactions involving 13.5 billion shares without being subject by Wedbush to any review for potentially manipulative trading.
Also, since June 2015, Wedbush failed to supervise the trading activities of its proprietary traders and other firm customers for potential layering and spoofing.
Therefore, the firm violated FINRA Rules 3110 and 2010.
Wedbush has agreed to a censure and a total fine of $975,000, of which $82,142.85 shall be paid to FINRA. The remainder of the fine will be paid to Cboe BYX Exchange, Inc (BYX); BZX; Cboe EDGA Exchange, Inc. (EDGA); Cboe EDGX Exchange, Inc. (EDGX); Nasdaq; Nasdaq BX, Inc. (BX); Nasdaq Phlx LLC (Phlx); New York Stock Exchange LLC (NYSE); NYSE Arca; and Investors Exchange LLC (IEX).