X-Change Financial Access, LLC (XCHG) has reached a settlement of alleged Cboe Exchange rule violations.
The settlement envisages a censure and a joint and several monetary fine with Brian Brown, a former X-Change Financial Access, LLC Floor Broker, in the amount of $550,000.
From on or about May 3, 2021 to on or about November 4, 2022 (the Review Period), Brian Brown was an Associated Person of XCHG and was employed by XCHG as a Floor Broker. Brown is no longer employed by XCHG.
During the Review Period, XCHG executed trades on a client’s behalf (“Firm A”) pursuant to an arrangement Brown made with a trader at Firm A. The Arrangement was suggested by a trader at Firm A and permitted Brown discretion, on Firm A’s behalf, to create and fill up to 20% of the contra sides of certain retail customer SPX options orders. The Firm A trader that Brown made the Arrangement with represented to Brown that he discussed the Arrangement with a Firm A compliance employee.
Per the Arrangement, Firm A gave Brown, on behalf of XCHG, authority to cross certain retail customer SPX options orders if the trading floor was interested in participating on the full volume of the order(s) with Firm A as a contra-side to the customer order(s) for up to 20% of those orders’ volumes. Brown was not required to receive an order from Firm A on an order-by-order basis and Firm A did not become aware of its participation in the execution of any orders until after the transactions were completed.
XCHG, through Brown’s actions as an XCHG Floor Broker, failed to properly represent orders to the Exchange’s trading crowd that were created pursuant to the Arrangement. Firm A’s participation in any of these trades was governed by the Arrangement between XCHG and Firm A rather than by any orders Brown received from Firm A.
During the Review Period, XCHG, through Brown’s and others’ actions as XCHG Floor Brokers, executed approximately 800 trades for Firm A without first receiving an order from it.
Once the Arrangement was brought to their attention, the XCHG CCO and CEO immediately halted the activity.
Additionally, Brown, acting as an XCHG Floor Broker, executed orders over which he had discretion as to the choice of the specific SPX options series to be bought or sold; the number of contracts to be bought or sold; and whether such transaction was a buy or sell transaction.
From on or about February 4, 2021 through September 9, 2022, XCHG failed to establish, maintain, and enforce written supervisory procedures (WSPs), and a system for applying such procedures reasonably designed to prevent and detect violations of the above-referenced Exchange Rules related to order handling, open outcry trading, and Floor Broker responsibilities.
Specifically, the Firm’s WSPs and systems for applying such WSPs were not designed to ensure that its Floor Brokers knew, understood, and followed Exchange Rules and such procedures related to:
- Exchange Rules and the Firm’s own prohibition against Floor Brokers having discretion on orders; and
- Crossing and solicitation of orders in accordance with Exchange rules relating to satisfying crowd interest, open outcry, and the priority of solicited orders.
In light of the alleged rule violations described above, the firm consents to the imposition of the following sanctions:
- A censure for XCHG; and
- A joint and several fine with Brown in the amount of $550,000.
