SpeedRoute: FINRA fines $310k for unreasonably supervising manipulation

Rick Steves

The provider of market access and routing/execution services to broker-dealer clients on an agency basis did not have a proper supervisory system to prevent layering, spoofing, and prearranged and wash trades, FINRA alleged.

FINRA has fined SpeedRoute, a U.S. Equity order routing and market structure, as part of the settlement deal to stop the regulator’s enforcement regarding alleged violations.

A FINRA member since August 2000, SpeedRoute provides market access and routing/execution services to broker-dealer clients on an agency basis and does not engage in proprietary trading.

According to FINRA’s allegations, from a period between 2014 and 2017, SpeedRoute failed to establish and maintain a supervisory system, including supervisory procedures, reasonably designed to achieve compliance with rules prohibiting manipulative activity, including layering, spoofing, and prearranged and wash trades.

From September 6, 2017 through March 6, 2018, the firm allegedly failed to comply with various provisions of Securities Exchange Act Rule 15c3-5 relating to establishing, monitoring, and amending customer credit limits and conducting annual reviews and
certifications of the effectiveness of its market access risk management controls and supervisory procedures.

In addition, from September 2014 through November 2020, SpeedRoute submitted more than 1.1 billion reports to the Order Audit Trail System (OATS) with incorrect codes in certain fields. Approximately 850 million such reports occurred between September 2014 and September 2015.

SpeedRoute also failed to establish, maintain, and enforce written procedures that were reasonably designed to achieve compliance with its OATS reporting, according to FINRA.

SpeedRoute accepted a censure and a total fine of $310,000 ($187,500 to be paid jointly to FINRA and IEX for failing to supervise to identify potentially manipulative activity and for the violations of Rule 15c3-5, of which $143,500 is allocated to FINRA; $90,000 for the violations of FINRA Rule 7450, all allocated to FINRA; and $32,500 for failing to supervise for compliance with Rule 7450, all allocated to FINRA).

The firm’s WSP did not disclose a description of supervisory reviews for potentially manipulative trading activity. The firm relied, in part, on manual reviews of trade blotters to detect potentially manipulative conduct, which was unreasonable given the number of orders the firm routed: approximately 10 million orders per day.

For reviews where parameters were available, the parameters were set such that they would have excluded certain potentially manipulative activities, such as wash trades, spoofing, and layering, which usually occur with small share orders.

FINRA has recently reached a settlement with Credit Suisse Securities USA for a $345,000 fine. The regulator found that as of September 2017, Credit Suisse USA had a backlog of about 8,000 accounts with approximately 52,000 trades that could not be matched to a specific employee.

In the aftermath of the Gamestop stock trading frenzy fueled by the WallStreetBets subreddit and other social media groups, FINRA’s Greg Ruppert argued in favor of a holistic approach to supervision in capital markets, an oversight beyond just the trading activity.

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