Lightspeed Trading settles with SEC over Securities Act violations
The Securities and Exchange Commission (SEC) has agreed to accept a settlement offer proposed by Lightspeed Trading, LLC.
The SEC proceedings arise from the misrepresentations and omissions that, Lightspeed Trading, LLC, an introducing broker, made to its customers about how it would direct their orders to trade equity securities and the fees it would charge for executing such orders (“market center fees”). Lightspeed told its customers they could direct their orders to the trading venues of their choice and they would be charged the market center fees that Lightspeed incurred in executing their orders.
In reality, Lightspeed disregarded many of its customers’ directions and instead sent those orders to an affiliated broker-dealer (the “Routing Broker”), which routed the customer orders for execution and generally charged Lightspeed no or low market center fees.
Lightspeed failed to disclose the Routing Broker’s involvement and never disclosed to its customers that it routed their orders in contravention of their directions. Despite misdirecting its customers’ orders, Lightspeed still charged its customers the fees for the market centers that they had selected, even though Lightspeed incurred lower fees or no fees at all.
As a result, from December 2015 through July 2016, Lightspeed received more than $300,000 from overcharging its customers in connection with the offer and sale of securities. Lightspeed’s misconduct violated Section 17(a)(2) and 17(a)(3) of the Securities Act.
As of 2012, Lightspeed offered customers “Lightspeed Trader,” a trading platform through which investors could trade equity securities. Lightspeed advertised that it charged its customers a commission on each trade and passed through other fees, such as “market center” fees, to its customers on a per share basis.
Lightspeed represented to its customers that they could access the liquidity displayed at a specific exchange to receive the best fill for their orders. Lightspeed heavily marketed this option, which it referred to as “direct market access” or “DMA.” It represented that its customers could “direct your order to the destination of your choice.” Lightspeed promoted the benefits of direct market access and advertised direct market access as a distinguishing and material feature of its Lightspeed Trader platform.
By January 2012, the company had decided to change its business model and profit from its order flow. Lightspeed sought to route orders to brokers or trading venues that would either compensate Lightspeed for its customers’ orders or reduce Lightspeed’s trading costs.
In early 2012, Lightspeed’s parent company entered into a joint venture with a hedge fund to create a routing broker to monetize its order flow. Routing Broker was formed from a registered broker-dealer Lightspeed’s parent no longer utilized. Lightspeed intended to make money by sending its customer orders to the new Routing Broker, which would charge either no market center fees or lower fees than the venues to which Lightspeed’s customers could direct their orders using Lightspeed Trader.
In 2013, Lightspeed started sending to Routing Broker a significant number of equity orders that customers had placed using its Lightspeed Trader platform. But Lightspeed did so in contravention of its customers’ express directions. Lightspeed never listed Routing Broker on its dropdown menu as a trade destination or route. Routing Broker was not an option on Lightspeed Trader, so customers could not select Routing Broker or direct their trades to Routing Broker.
To send orders to Routing Broker, Lightspeed treated directed orders as non-directed orders. Lightspeed re-engineered its software protocols so that when a customer in Lightspeed Trader directed an order to NASDAQ, ARCA, or EDGX, Lightspeed redirected the order to Routing Broker. Routing Broker then executed the orders at whatever venue was most advantageous to Routing Broker.
At the peak, Lightspeed redirected to Routing Broker more than 10% of the total National Market System (“NMS”) orders it received across all of its trading platforms.
From December 2015 through the third quarter of July 2016, Routing Broker filled on behalf of Lightspeed’s customers more than 900,000 trade orders involving more than 650 million shares of NMS stocks. During this period, Lightspeed misdirected orders from more than 500 customers and improperly overcharged those customers more than $300,000 in market center fees on orders improperly routed to Routing Broker.
Lightspeed never updated the representations on its website about providing direct market access and passing through market center fees from the exchanges to its customers. Lightspeed continued to misrepresent on its website that it: (1)provided customers with “direct market access” to NASDAQ, ARCA, and EDGX; and (2) charged customers the market center fees it had incurred when its customers’ chose NASDAQ, ARCA, or EDGX.
In emails to customers and potential customers, Lightspeed again failed to conform its statements to its actual practice. Lightspeed misled recipients by stating that the Lightspeed Trader platform provides “direct market access routing.” Lightspeed also misled recipients by including links to its pricing web page, which contained false representations about the basis for market center fees Lightspeed charged its customers.
As a result of the conduct described above, Lightspeed violated Section 17(a)(2) and (3) of the Securities Act which prohibits fraudulent conduct in the offer and sale of securities.
Lightspeed agrees to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) or 17(a)(3) of the Securities Act. The company must also pay disgorgement of $306,400 and prejudgment interest of $67,026.14 to the Securities and Exchange Commission.
Based upon Lightspeed’s sworn representations in its Statement of Financial Condition and other documents submitted to the Commission, the SEC is not imposing a penalty against the respondent.