FINRA fines Lime Brokerage over surveillance system deficiencies
From September 2012 through August 2016, certain of Lime’s direct market access customers engaged in trading activity that raised red flags at Lime for potential manipulative trading.
The United States Financial Industry Regulatory Authority (FINRA) has decided to accept a Letter of Acceptance, Waiver and Consent (AWC) submitted by New York-based broker-dealer Lime Brokerage LLC for the purpose of settlement of alleged rule violations. FINRA signed the AWC on August 15, 2019.
From September 1, 2012 through August 3, 2016 (the “Review Period”), Lime offered direct market access customers the ability to trade directly on multiple securities exchanges under Lime’s exchange memberships. During the Review Period, certain of Lime’s direct market access customers engaged in trading activity that raised red flags at Lime for potential manipulative trading, including a variety of practices, such as “layering,” “spoofing,” “ramping,” and “marking.”
However, Lime failed to establish and maintain a supervisory system and written supervisory procedures (“WSPs”) reasonably designed to achieve compliance with securities laws and rules in connection with its direct market access customers’ trading activity through the firm.
Beginning in December 2014, and through the end of the Review Period, Lime tasked a single analyst with manually reviewing the Surveillance System alerts. Lime delegated to the analyst authority to investigate and close out surveillance alerts, but did not provide the analyst with any written guidance or explanation of the factors to consider in reviewing the alerts and determining alert categories or dispositions. Prior to joining Lime, the analyst had not used the Surveillance System or conducted surveillance for all the forms of potentially manipulative trading identified by the Surveillance System.
During the Review Period, Lime failed to reasonably respond to red flags of potentially manipulative trading by its direct market access customers. These red flags included thousands of Surveillance System alerts that were generated by two such customers, including the following:
- a. Customer A, a foreign investment fund, generated over 900 Surveillance System alerts for potential layering or spoofing between March 2015 and July 2016. Each time that Lime’s analyst questioned Customer A about an alert, the analyst accepted the customer’s explanation of the trading and closed the alert with no further action.
- b. Customer B, a domestic investment fund, generated over 1,000 Surveillance System alerts, including over 500 alerts for possible ramping and marking the close, between December 2014 and July 2016. Each time that Lime’s analyst questioned Customer B about an alert, the analyst accepted the customer’s explanation of the trading and closed the alert with no further action.
As a result, during the Review Period, Lime failed to supervise to achieve compliance with applicable securities laws, rules and regulations prohibiting layering, spoofing and other manipulation, and failed to observe high standards of commercial honor and just and equitable principles of trade. In addition, Lime failed to establish, maintain, and enforce WSPs reasonably designed to achieve compliance with applicable securities laws and regulations and FINRA Rules.
The foregoing supervisory failures by Lime 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.
The firm consents to the imposition of the following sanctions:
- 1. A censure;
- 2. A total fine of $625,000, of which $38,500 is payable to FINRA; and the balance is payable to (i) Cboe BYX Exchange, Inc.; (ii) Cboe BZX Exchange, Inc.; (iii) Cboe EDGA Exchange, Inc.; (iv) Cboe EDGX Exchange, Inc.; (v) the NASDAQ Stock Market, LLC; (vi) Nasdaq BX, Inc.; and (vii) Nasdaq PHLX LLC.
- 3. An undertaking to provide a written report to FINRA concerning reasonable controls, procedures, and other measures taken by the firm to remediate the violative conduct described herein regarding its supervision of direct market access customer activity with respect to potential manipulative trading by its customers.