Virtu Americas agrees to pay $1.5m to settle SEC proceedings related to KCG Americas
The proceedings stem from the failure of Virtu Americas’s predecessor entity, KCG Americas LLC, to comply with Regulation Systems Compliance and Integrity.
Virtu Americas LLC, formerly known as KCG Americas LLC, has agreed to pay $1.5 million as a part of a settlement with the United States Securities and Exchange Commission (SEC).
The administrative proceedings stem from the failure of Virtu Americas’s predecessor entity, KCG Americas LLC, to comply with Regulation Systems Compliance and Integrity (Regulation SCI).
Regulation SCI got into effect on February 3, 2015. It applies to certain ATSs, self-regulatory organizations, plan processors, and exempt clearing agencies. Specifically, Regulation SCI is designed to respond to concerns that “given the speed and interconnected nature of the U.S. securities markets, a seemingly minor systems problem at a single entity can quickly create losses and liability for market participants, and spread rapidly across the national market system, potentially creating widespread damage and harm to market participants, including investors.”
Under Rule 1000 of Regulation SCI, an ATS can meet the definition of an SCI ATS in two ways. As relevant in the case at hand, an SCI ATS is defined as “an alternative trading system . . . which during at least four of the preceding six calendar months . . . had with respect to NMS stocks . . . 5% or more in any single NMS stock, and one-quarter percent (.25%) or more in all NMS stocks, of the average daily dollar volume reported by applicable transaction reporting plans.”
Any ATS that met the definition of an SCI ATS at the time Regulation SCI got into effect on February 3, 2015 was required to be in compliance with Regulation SCI by November 3, 2015.
At all times relevant to the SEC’s Order, KCG MatchIt (an alternative trading system) exceeded the relevant volume threshold for all NMS stocks set forth by Regulation SCI. KCG MatchIt also exceeded the Regulation SCI volume threshold for single NMS stocks at times during the relevant period, thereby qualifying as an SCI ATS.
The SEC explains that Virtu Americas owns and operates Virtu MatchIt, formerly known as KCG MatchIt, an alternative trading system commonly referred to as a “dark pool.” Under Regulation SCI, an ATS that exceeds certain trading volume thresholds is defined as an SCI ATS and, thus, is required to comply with the substantive provisions of Regulation SCI.
KCG Americas tried to keep KCG MatchIt’s trading volume below those volume thresholds by implementing an automated system to monitor the trading activity on KCG MatchIt. This volume monitoring system aimed to halt trading in particular securities before their trading volume exceeded the SCI ATS definitional volume thresholds. Due to an error in the reporting logic that calculated execution volumes for KCG MatchIt, however, the volume monitoring system did not work as intended and, due to this, KCG MatchIt exceeded the relevant volume thresholds and became an SCI ATS starting on February 3, 2015 and continuing for at least a year and a half.
Accordingly, says the SEC, KCGA was required to be in compliance with Regulation SCI starting on November 3, 2015. Despite KCG MatchIt being subject to the requirements of Regulation SCI, KCG Americas did not comply with certain provisions of Regulation SCI.
As a result of the error, KCG Americas did not comply with certain provisions of Regulation SCI beginning on November 3, 2015. Specifically, KCGA did not: (a) establish the policies and procedures required by Regulation SCI; (b) file any quarterly or annual reports required by Regulation SCI; (c) conduct an annual Regulation SCI compliance review; (d) comply with various business continuity and disaster recovery plan requirements of Regulation SCI; or (e) maintain the books and records required by Regulation SCI.
KCG Americas managed to fix the error in the reporting logic that calculated execution volumes for KCG MatchIt in October 2016.
In August 2017, KCG Americas identified another operational issue with the timing of two batch processes used to pull data for the volume monitoring system. Because of the batching issue, KCG MatchIt exceeded the Regulation SCI volume thresholds for single NMS stocks on certain occasions after October 2016 through April 2017. KCG Americas fixed the batching issue upon identifying it.
In addition to the monetary penalty, Virtu Americas agrees to cease and desist from committing or causing any violations and any future violations of Rules 1001, 1003, 1004, and 1005 of Regulation SCI, promulgated under the Exchange Act. The company is also censured.
