Interactive Brokers LLC has agreed to pay a $900,000 fine as a part of a settlement with The Nasdaq Stock Market LLC.

From at least April 12, 2021 through August 2023 (the “Relevant Period”), IBKR’s supervisory system was not reasonably designed to prevent potentially manipulative activity effected through omnibus accounts.

First, orders and trading activity from the omnibus accounts of the Foreign Introducing Brokers triggered exception reports, some of which IBKR deemed actionable. However, in some cases, IBKR closed reports without reasonable action to prevent further trading by the responsible ultimate beneficial owners and, at times, failed to conduct reasonable investigations into the trading activity.

When IBKR determined to restrict ultimate beneficial owners from trading, IBKR relied on Foreign Affiliate A to ask its Foreign Introducing Brokers to implement these account restrictions.

However, IBKR closed some compliance reviews without confirming the restrictions were imposed by the Foreign Introducing Broker. This reliance on unaffiliated foreign introducing brokers, without adequate safeguards, was unreasonable.

Second, the volume of exception reports and regulatory inquiries regarding potentially manipulative trading of certain securities through the omnibus accounts of Foreign Introducing Brokers A and B constituted red flags. IBKR, however, did not impose adequate restrictions on trading of microcap securities through the omnibus accounts of Foreign Introducing Broker A until May 2023 (and never imposed similar restrictions on omnibus accounts of Foreign Introducing Broker B.)

IBKR’s process during the Relevant Period for implementing some of the restrictions on the omnibus accounts of Foreign Introducing Broker A allowed Foreign Introducing Broker A to make certain trades that the restrictions were intended to prevent. Since the Relevant Period, IBKR has enhanced its process for implementing these restrictions.

Third, in March 2021, IBKR began requesting that certain foreign introducing brokers append to each order message an anonymous identifier (“Unique ID”) specific to the omnibus subaccount responsible for the order to provide its personnel with more visibility into the omnibus subaccount. IBKR used this information in analyzing a subset of alerts in 2021, but did not incorporate Unique ID logic into all major exception reports until August 2023. The absence of this functionality or another reasonable process impeded IBKR’s ability to consider ultimate beneficial owners’ trading and compliance history.

IBKR later released functionality for its order management systems to automatically reject an order from a foreign introducing broker if the order either violated ultimate beneficial owner-specific restrictions or lacked a Unique ID. This functionality was intended to replace IBKR’s former practice of relying on foreign introducing brokers to implement trading restrictions on its behalf.

During the Relevant Period, IBKR’s WSPs were not reasonably designed to achieve full compliance with General 9, Section 20(a). For example, during a portion of the Relevant Period, the written supervisory procedures (WSPs) provided insufficient guidance on how to investigate and resolve exception reports relating to omnibus accounts. IBKR later introduced new surveillance reports to aid in detecting potential manipulative trading requiring additional scrutiny in those omnibus accounts and introduced additional guidance for reasonably resolving these reports.

Based on the foregoing conduct described in paragraphs 7 through 12, IBKR violated Nasdaq Rules General 9, Sections 20(a) and 1(a).

On top of the $900,000 fine, IBKR has agreed to a censure.