Cantor Fitzgerald & Co has agreed to pay a fine of $100,000 as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
From July 2017 through May 2019, Cantor Fitzgerald acted as a market-maker in OTC securities, including securities quoted on OTC Link LLC, an inter-dealer quotation system formerly referred to as the “Pink Sheets.”
As a market-maker that quoted on OTC Link, the firm had access to, and regularly used, an electronic messaging service. This electronic messaging service enabled the firm and other individual market-makers to send each other messages (OTC Link messages) indicating an interest to buy or sell a specific number of shares of a security at a particular price.
During this period, Cantor Fitzgerald’s market-making desk sent and received OTC Link messages to and from other dealers. Cantor Fitzgerald, however, did not integrate the OTC Link messages that it received into its order management system used to execute orders.
As a result, on certain occasions, due to the firm’s manual process, Cantor Fitzgerald did not execute an order received from a customer at another broker-dealer at the better available price as reflected in an OTC Link message received.
From July 2017 through May 2019, Cantor Fitzgerald did not provide best execution in connection with 2,395 orders in OTC securities by failing to use reasonable diligence to ascertain the best market for the subject securities and to buy or sell in such market so that the resultant prices to the customers were as favorable as possible under prevailing market conditions.
Therefore, Cantor Fitzgerald violated FINRA Rules 5310 and 2010.
From July 2017 through April 2018, Cantor Fitzgerald’s supervisory system for best execution in OTC securities failed to account for price opportunities available through OTC Link messages when evaluating the execution quality of customer orders received from other broker-dealers.
Because the firm’s supervisory system excluded reviews of prices available in OTC Link messages, it had no way to determine whether such orders received an inferior execution price to that available via OTC Link messages.
In May 2018, Cantor Fitzgerald incorporated OTC Link messages into its best execution supervision review, and required price adjustments for customers when warranted. The review, however, had unreasonably narrow parameters and was not functional for the entire period.
Specifically, the firm only reviewed trades that were executed from 9:45 a.m. to 3:45 p.m., when the customer order and OTC Link message were executable for at least five seconds, and when the potential price improvement was at least $10. These parameters resulted in numerous customer transaction prices in OTC securities not being compared to potentially better priced OTC Link messages.
Moreover, a technical issue during the period caused the exception report to generate no data for 75 trading days, further causing the firm to miss potentially better priced OTC Link messages.
As a result, the firm did not have a supervisory system reasonably designed to achieve compliance with its best execution obligations for customer orders in OTC securities.
Therefore, Cantor Fitzgerald violated FINRA Rules 3110(a) and 2010.
In addition to the $100,000 fine, the respondent consents to the imposition of a censure and restitution of $51,214.16 plus interest.
