Flow Traders U.S. LLC has agreed to pay a fine of $50,000 as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
From at least August 2019 through April 2023, Flow Traders failed to establish, document, and maintain financial risk management controls and supervisory procedures that were reasonably designed to prevent the entry of orders that exceeded appropriate pre-set capital thresholds in the aggregate for the firm.
The firm’s written supervisory procedures (WSPs) set forth a maximum notional value position limit for symbols in which the firm was a registered market maker, for symbols in which it was not, and for manual orders. In practice, the maximum position limit value control set for each individual equity symbol during the review period was narrower than the maximum amounts set forth in the firm’s WSPs. However, even these narrower position limits were unreasonable.
For most securities reviewed during this period, Flow Traders used less than five percent of the daily maximum position limit set by the firm per symbol. These pre-set capital thresholds were unreasonable because they were set too high, and Flow Traders failed to demonstrate how the thresholds were reasonably designed to meaningfully limit the financial exposure generated from the firm’s trading activity in the aggregate. In April 2023, the firm revised its pre-set capital thresholds and related supervisory procedures.
By failing to establish, document, and maintain financial risk management controls and supervisory procedures that were reasonably designed to prevent the entry of orders that exceeded appropriate pre-set capital thresholds in the aggregate for the firm, Flow Traders violated § 15(c)(3) of the Exchange Act, Exchange Act Rules 15c3-5(b) and (c)(1)(i), and FINRA Rules 3110 and 2010.
Also, from at least August 2019 through April 2023, Flow Traders failed to establish, document, and maintain financial risk management controls and supervisory procedures that were reasonably designed to prevent the firm’s entry of erroneous orders. The firm’s WSPs set forth a maximum notional value per order for symbols in which the firm was a registered market maker, for symbols in which it was not, and for manual orders.
In practice, the firm’s actual limits for each symbol were narrower than the maximum amounts set forth in the WSPs. However, even these narrower limits were unreasonable.
For most securities sampled during this period, Flow Traders set a daily maximum single order size limit of more than 100 percent of each symbol’s average daily volume. The limits were unreasonable because they were set too high to reasonably prevent the entry of erroneous orders, and Flow Traders failed to demonstrate how its daily maximum order size thresholds were reasonably aligned with the trading characteristics of each symbol.
By failing to establish, document, and maintain financial risk management controls and supervisory procedures that were reasonably designed to prevent the entry of erroneous orders, Flow Traders violated § 15(c)(3) of the Exchange Act, Exchange Act Rules 15c3- 5(b) and (c)(1)(ii), and FINRA Rules 3110 and 2010.
On top of the fine, the firm has agreed to a censure.
