Clearpool agrees to pay fine over execution of orders from fund suspected of manipulative trading

Maria Nikolova

Despite being aware of potentially manipulative trading by the fund, Clearpool continued to execute and introduce orders from the fund.

The United States Financial Industry Regulatory Authority (FINRA) on Wednesday, July 10, 2019, decided to agree with a Letter of Acceptance, Waiver and Consent submitted by Clearpool Execution Services, LLC, a broker-dealer headquartered in New York.

The disciplinary action is related to a matter where FINRA’s Department of Market Regulation, Quality of Markets team, on behalf of FINRA and ten exchanges,’ identified and reviewed potentially manipulative trading activity by a foreign, unregistered proprietary trading fund (Fund X) that was an affiliate and customer of Clearpool.

From July 2014 to September 2016, Clearpool executed Fund X’s trades and introduced its order flow to other broker-dealers for execution. Fund X traded through more than 1,000 foreign, unregistered individual traders, and triggered thousands of surveillance alerts at FINRA and multiple exchanges for potentially manipulative trading known as “layering” and “spoofing.”

Despite being on notice of potentially manipulative trading by Fund X, Clearpool terminated the trading access of hundreds of individual traders, but continued to execute and introduce orders from Fund X.

As a result, from July 2014 through September 2016, Clearpool failed to establish and maintain a system that was reasonably designed to achieve compliance with applicable securities laws and regulation and applicable FINRA rules.

Specifically, from approximately July 2014 through January 2015, Clearpool used a proprietary system to perform certain pre-trade checks designed to block potentially manipulative orders and to generate exception reports that identified potentially manipulative trading on the day after a trading day (T+1).

Despite the pre-trade checks, Clearpool’s exception reports detected significant numbers of indicators for potential manipulation. Clearpool’s reviews of the exception reports were not reasonably designed to detect and prevent manipulative activity. No matter how many alerts were generated on a report, Clearpool only reviewed the exceptions relating to the five securities with the most trading events and relating to the five securities with the lowest average daily trading volume.

Clearpool terminated individual traders’ ability to trade for Fund X, but allowed hundreds of other traders with Fund X to continue trading through Clearpool. Fund X continued to generate thousands of layering and other manipulation alerts at FINRA, multiple exchanges, and in Clearpool’s proprietary surveillance systems.

Further, Clearpool’s written procedures were also deficient in that they failed to explain how to select the sample to be reviewed and how to review the exception reports, such as how to identify manipulative trading.

Beginning in February 2015, Clearpool replaced its first system of pre-trade checks with a real-time surveillance system. In June 2015, Clearpool implemented a feature in its real-time surveillance system that automatically imposed trading limitations or blocks on a trader once the trader’s activity had crossed pre-set scoring thresholds for suspicious activity. Clearpool, however, set these scoring thresholds at levels that did not prevent further problematic trading, as Fund X continued generating layering surveillance alerts at FINRA, multiple equity exchanges, and even in Clearpool’s systems. In or about March 2016, Clearpool modified its real-time surveillance scoring thresholds, and the number of exceptions decreased. Yet, Clearpool was on notice that Fund X’s trading continued to be the subject of regulators’ concerns through mid-2016.

Thus, the respondent violated NASD Rule 3010(a) (before December 1, 2014) and FINRA Rule 3110(a) (on and after December 1, 2014),as well as FINRA Rule 2010. In addition, Clearpool failed to establish, maintain, and enforce written procedures reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. Thus, Clearpool violated NASD Rule 3010(b) and FNRA Rule 3110(b), as well as FINRA Rule 2010.

The Respondent consents to the imposition of a censure and a total fine of $473,000, of which $43,000 is payable to FINRA. The balance is paid to the following self-regulatory organizations: Nasdaq Stock Market LLC, Nasdaq BX, Inc., Nasdaq PHLX LLC, Cboe BZX Exchange, Inc., Cboe BYX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., NYSE Arca, Inc., the New York Stock Exchange LLC, and NYSE American LLC.

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