SEC Charges 14 Specialist Firms
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14 Specialists Caught by SEC--better never than late?
Written: March 4, 2009
By Bill Singer
There's nothing in the street
Looks any different to me
And the slogans are replaced, by-the-bye
The Dramatic News
Today, March 4th, the Securities and Exchange Commission --the new and improved federal regulator of Wall Street -- issued a dramatic press release entitled: SEC Charges 14 Specialist Firms for Improper Proprietary Trading (http://sec.gov/news/press/2009/2009-42.htm). We read that the SEC charged 14 specialist firms for violating their fundamental obligation to serve public customer orders over their own proprietary interests by "trading ahead" of customer orders, or "interpositioning" the firms' proprietary accounts between customer orders.
Just the Facts
For engaging in allegedly improper proprietary trading on the American Stock Exchange, the Chicago Board Options Exchange, and the Philadelphia Stock Exchange, the SEC instituted settled administrative and cease-and-desist proceedings against:
Botta Capital Management L.L.C.;
Equitec Proprietary Markets LLC;
Group One Trading L.P.;
Knight Financial Products LLC;
Goldman Sachs Execution & Clearing L.P.;
SLK-Hull Derivatives LLC;
Susquehanna Investment Group; and
TD Options LLC
In the orders against the above eight firms, the SEC found that by engaging in unlawful proprietary trading, the firms each violated Section 11(b) of the Securities Exchange Act of 1934 and Rule 11b-1 thereunder, as well as various rules in effect on each of the exchanges. The SEC censured each firm and ordered those firms to pay, in the aggregate, more than $22.7 million in disgorgement and more than $4.3 million in penalties; and to cease-and-desist from future violations. The firms consented to the entry of the orders without admitting or denying the findings.
For engaging in allegedly improper proprietary trading on the Chicago Stock Exchange, the SEC also filed settled civil injunctive actions in the U.S. District Court for the Southern District of New York against :
Automated Trading Desk Specialists LLC;
E*Trade Capital Markets LLC;
Melvin Securities LLC;
Melvin & Company LLC;
Sydan LP; and
TradeLink LLC. .
In its complaints filed against the above six firms, brought pursuant to Section 21(d) and (e) of the Exchange Act, the SEC alleges that by engaging in unlawful proprietary trading, each of the firms violated Chicago Stock Exchange Article 9, Rule 17. The complaints also allege that each of those firms failed to make or keep current records pertaining to certain types of orders, in violation of Section 17(a) of the Exchange Act and Rule 17a-3(a)(1) thereunder. Those firms have agreed to settle the SEC's charges by consenting to the entry of judgments enjoining them from future violations of the above provisions, and ordering them to pay, in the aggregate, more than $35.7 million in disgorgement and more than $6.7 million in penalties. The consent judgments are subject to approval by the court.
The Nastiness Detailed
According to the SEC, the improper proprietary trading took three basic forms:
trading ahead: In certain instances, specialists filled one agency order through a proprietary trade for their firm's account while a matchable agency order was present on the opposite side of the market, thereby improperly "trading ahead" of such opposite-side executable agency order. The customer order that was traded ahead of was then disadvantaged when it was subsequently #ffff00">executed at a price that was inferior to the price received by the firm's proprietary account.
interpositioning: In some instances, after trading ahead, specialists also traded proprietarily with the matchable opposite-side agency order that had been traded ahead of, thereby interpositioning themselves between the two agency orders that should have been paired off in the first instance. By participating on both sides of trades, the #ffff00">specialist captured the spread between the purchase and sale prices, thereby disadvantaging the other parties to the transactions, and
trading ahead of unexecuted open or cancelled orders: In some instances, after the specialists traded ahead, the #ffff00">opposite-side executable agency orders were left open until the end of the trading day, or were cancelled by the customer prior to the close of the trading day before receiving an execution.
Read It and Weep
Order in the Matter of Botta Capital Management, L.L.C.
Order in the Matter of Equitec Proprietary Markets, LLC
Order in the Matter of Group One Trading, L.P.
Order in the Matter of Knight Financial Products, LLC
Order in the Matter of Goldman Sachs Execution & Clearing L.P. and SLK-Hull Derivatives LLC
Order in the Matter of Susquehanna Investment Group
Order in the Matter of TD Options LLC
Trying to Gloss Over?
A tad lost in the hub bub about all the dollars and violations and legal mumbo jumbo is this troubling sentence in the Press Release:
According to the SEC's orders and complaints, from #ffff00">1999 through 2005, the firms violated their basic obligation as specialists to serve public customer orders over their own proprietary interests.
If you read the Goldman/SLK Order, you will note this statement in Paragraph 13:
The majority of the customer disadvantage relates to violative trading that occurred between 1999 and 2002.
You will also note the same language in Paragraph 12 of the Botta Order; Paragraph 12 of the Equitec Order; Paragraph 12 of the Group One Order; Paragraph 12 of the Knight Order; Paragraph 12 of the Susquehanna Order; and Paragraph 12 of the TD Order.
So, it's not as the Press Release sort of suggests that the violations were as recent as, say 2005. No, it's actually worse than that: The bulk of the anti-consumer activity ended way back in 2002---that's a full three years early than the range in the Press Release (and, yeah, I understand that the release is covering "all" of the alleged misconduct and not merely the "customer disadvantage trading.")
The Sad Refrain
And here we are today. Ten years later. Seven years later. Four years later. You pick your starting line.
I mean what the hell were all these industry cops doing for so long--chasing Bernie Madoff or Allen Stanford?
Meet the new boss
Same as the old boss
From "Won't Get Fooled Again," by the Who