No matter how fast a trader you are, sometimes it is simply impossible to outrun the long arm of the law.
Just ask high-frequency trading firm Latour Trading, which has opted to settle charges that it violated market structure rules brought by the Securities and Exchange Commission. As a result of setting these allegations, the HFT firm has agreed to pay approximately $8 million dollars.
Latour agreed to a settlement in which it will pay a $5 million civil penalty and more than $3 million of disgorgement of gross trading profits, rebates paid to it by exchanges, and prejudgment interest.
An SEC investigation found that Latour violated the SEC rules – the Market Access Rule and Regulation National Market System – over a nearly four-year period in which Latour sent millions of non-compliant orders to U.S. exchanges.
According to the order:
Latour shared portions of its electronic trading infrastructure with its parent company, Tower Research. Some Tower Research employees could change the computer code without Latour’s knowledge or approval. Latour’s procedures to prevent such changes from having unintended effects on Latour’s trading proved inadequate.
In June 2011, Tower Research made a coding change that introduced an error into the shared infrastructure and, as a result, Latour sent millions of orders to exchanges that did not comply with the requirements of Regulation NMS. Some of these orders were executed, which led to Latour receiving gross trading profits and also rebates paid by stock exchanges.
Latour lacked “direct and exclusive control” over its financial and regulatory risk management controls as required by the SEC’s Market Access Rule and did not have adequate post-trade surveillance tools to detect its non-compliant trades.
After learning of the error, Latour corrected many of the issues by October 2012 and addressed the rest by August 2014.
“Automated trading systems can pose significant risks to the market and must be designed and implemented correctly,” said Andrew Ceresney, Director of the SEC’s Enforcement Division. “Firms that do not have control over their trading systems can undermine the integrity of our markets by sending millions of orders that violate SEC and stock exchange rules that promote fair and orderly trading, like Latour did in this case.”
According to the SEC’s order, from October 2010 through August 2014, Latour sent approximately 12.6 million orders for more than 4.6 billion shares that did not comply with the requirements of Regulation NMS. The orders at issue were intermarket sweep orders (ISOs), which trading centers may immediately execute at prices that might otherwise appear to violate Rule 611 of Regulation NMS.
Rule 611 generally requires trades to be executed at the best available displayed price, but trading centers may execute ISOs immediately based on the ISO router’s obligation to send additional orders to execute against any better-priced displayed quotations. Chiefly because of the coding problem, Latour’s ISOs did not meet the requirements and caused more than 1.1 million trade-throughs (trades executed at a price worse than the best available price) and more 1.7 million locked or crossed markets (when the national best bid equals or exceeds the national best offer). Latour also sent non-compliant ISOs as a result of incorrectly relying on information about orders that Latour had previously sent. In addition to violations of the Market Access Rule, the SEC’s order also finds that Latour violated Rule 611(c) of Regulation NMS because it did not take reasonable steps to establish that its ISOs complied with Reg NMS.
In a statement, Latour said it has “consented to the entry of an order relating to Latour’s failure to comply with certain regulatory obligations related to its use of intermarket sweep orders (“ISOs”).
As described in the Commission’s order, these issues arose predominantly from a software coding error that affected the systems that Latour used to route ISOs. Latour also made a series of changes to its ISO routing logic that, under certain circumstances, caused it to send ISOs to the market that did not comply with the requirements of Regulation NMS.
Latour fully remediated these issues by August 2014. The Firm has also enhanced its systems and controls to detect and avert similar issues.
The Firm is pleased to put this matter behind us. We take our regulatory obligations seriously and are committed to complying with all rules and regulations applicable to our businesses.”
Without admitting or denying the findings, Latour is required to cease and desist from committing or causing violations of Section 15(c)(3) of the Exchange Act and Rule 15c3-5 thereunder and Rule 611(c) of Regulation NMS. Latour agreed to pay a $5 million penalty, disgorgement of $2,784,875 of gross trading profits and exchange-paid rebates, plus prejudgment interest of $268,564.
Robert Cohen, co-Chief of the Enforcement Division’s Market Abuse Unit added, “Market structure violations can have a real if sometimes subtle impact on our markets. Latour received executions and collected exchange rebates that it should not have and that other market participants might have received if not for Latour’s non-compliant orders.”