FINRA fines Jefferies over failures to monitor for potential layering or spoofing activity
FINRA has identified more than 150,000 instances of potential layering by direct market access customers of JefEx between January 1, 2014 and February 28, 2015.
The United States Financial Industry Regulatory Authority (FINRA) has imposed a fine of $215,000 on Jefferies Execution Services, now known as Jefferies LLC, as a part of a settlement with the firm over alleged rule violations.
From January 1, 2014 through February 28, 2015 (the Review Period), JefEx offered its clients direct market access to various securities exchanges. The firm. However, failed to implement a reasonably designed supervisory system and written supervisory procedures to monitor for potential layering or spoofing activity by its direct market access clients.
FINRA and other exchanges’ surveillance identified more than 150,000 instances of potential layering activity associated with JefEx’s order flow from June 2014 through February 2015. Nearly all (97%) of those instances of potential layering were concentrated from October 2014 through February 2015.
Upon receiving multiple notifications of the potential layering from an exchange layering from an exchange as early as November 2014, JefEx started developing a layering surveillance review, but it was not implemented until February 11, 2015.
After implementing its surveillance, JefEx identified one particular broker-dealer client (“Client A”) as potentially engaging in layering activity and terminated this client on February 13, 2015. Client A had placed approximately 24 million orders between September 2014 and February 2015. These 24 million orders accounted for 6% of JefEx’s direct market access order flow during this period.
The firm also updated its written supervisory procedures to reflect the integration of its layering and spoofing surveillance into its overall supervisory system and reviews. JefEx subsequently engaged the services of a third party surveillance system provider in August 2016, and completed implementation of the third party surveillance system in late 2017.
The firm has violated NASD Rules 3010(a) and (b) (for conduct prior to December 1, 2014), and FINRA Rules 3110(a) and (b) (for conduct on and after December 1, 2014) and 2010.