SpeedTrader, Inc. has agreed to pay a fine as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
At all relevant times, SpeedTrader provided direct market access to approximately 570 customers, consisting mostly of day traders, including numerous China-based day traders, and at least one foreign broker-dealer. Together, these customers traded billions of shares through the firm involving tens of billions of dollars.
SpeedTrader used an automated third-party system to surveil for potentially manipulative trading by its customers. The firm’s customers’ trading activity was automatically fed through the third-party surveillance system and, if certain parameters were met, the system would generate an exception alert.
From November 2017 through January 2020, SpeedTrader’s supervisory system for potentially manipulative trading was not reasonable in several respects.
First, SpeedTrader implemented its third-party surveillance system’s default parameters without assessing whether those parameters were reasonably tailored to the firm’s business model, including the type and nature of the firm’s customers’ order flow. In addition, SpeedTrader did not conduct any annual or periodic assessments of the system’s parameters, or the exceptions generated by those parameters, to determine whether they functioned as intended.
Second, SpeedTrader assigned only one trader identification number for each customer account at the firm, even when the account had more than one authorized trader. Therefore, SpeedTrader could not identify the specific traders responsible for exception alerts, which limited the firm’s ability to effectively review for and supervise potentially manipulative trading.
For example, in June 2018, a foreign broker-dealer with numerous authorized traders entered 11 orders within a matter of minutes to purchase and sell the same security. The resulting executions generated 42 automated exception alerts for potential wash trading, which SpeedTrader could not reasonably review without knowing the identity of the specific traders responsible for each order.
Third, the firm closed alerts without reasonable follow up and investigation of the underlying trading, including multiple alerts indicating patterns of suspicious trading by the same customer. For example, the firm reached out several times to one customer whose trading activity generated alerts for potentially manipulative trading but the customer failed to respond for months, and the firm did not place any restrictions on the customer.
Further, SpeedTrader’s closing comments for alerts were often repetitive and sometimes suggested an apparent misunderstanding of the nature of the trading. For example, the firm’s closing comments for layering and spoofing alerts often stated that the exceptions were due to the particular security’s underlying trading as “low float” and “volatile.” The volatility and float of a particular security, however, does not rule out the possibility of layering or spoofing.
Finally, SpeedTrader’s written supervisory procedures failed to provide reasonable guidance as to how the firm should review exception alerts to determine whether they were indicative of potential manipulative trading that should be escalated. The firm’s written supervisory procedures only directed that each exception alert should be reviewed “independently,” without explaining what “independently” meant or providing any additional guidance beyond that directive.
Therefore, SpeedTrader violated FINRA Rules 3110 and 2010.
From November 2017 through January 2020, SpeedTrader failed to establish, document, and maintain financial risk management controls and procedures reasonably designed to limit the financial and regulatory risks associated with its market access business activity.
SpeedTrader did not implement a system or controls to set the appropriate credit thresholds for each customer to which the firm provided market access. Rather than evaluating, setting, and modifying the buying power for its customers, SpeedTrader instead relied on its clearing firms to do so.
SpeedTrader also failed to provide any documentation evidencing how customers’ credit controls were established or that they were reasonably designed based upon the customer’s business, financial condition, or trading patterns. In addition, the firm did not document that it monitored whether the thresholds remained appropriate, or whether modifications to its credit controls were warranted.
The firm’s annual compliance certifications for 2017, 2018, and 2019 failed to state that the firm’s risk management controls and supervisory procedures complied with paragraphs (b) and (c) of Rule 15c3-5, as required.
Therefore, SpeedTrader violated Exchange Act § 15c3-5, Exchange Act Rules 15c3-5(b), (c), (d), and (e), and FINRA Rule 2010.
The firm has a agreed to a censure and a $165,000 fine, of which $13,200 shall be paid to FINRA. The remainder will be paid to EDGX, Nasdaq, and NYSE Arca.
