The Financial Industry Regulatory Authority, four national stock exchanges and the Securities and Exchange Commission Tuesday took action against an online trading firm for allegedly allowing traders overseas manipulate prices of stocks on U.S. markets.
The SEC said Hold Brothers On-Line Investment Services ignored “red flags” that traders from outside the United States were using accounts provided by the firm to “repeatedly” manipulate stocks, in an illegal practice called either “layering” or “spoofing.”
FINRA, along with NYSE Arca, the NASDAQ Stock Market, NASDAQ OMX BX and BATS Exchange, said they censured and fined Hold Brothers for manipulative trading activities, avoidance of anti-money laundering practices and other violations.
The fine levied by FINRA and the exchanges was $3.4 million. Hold Brothers settled its case with the SEC for $2.5 million.
In layering, the trading firm or firms involved send out waves of false orders intended to give the impression that the market for shares of a particular security at that moment is deep.
The technique may also use a large amount of “wash trades,” that have no economic effect, to achieve the appearance of market depth. The traders then take advantage of the market’s reaction to the layering of orders.
In spoofing, the trader or traders involved will send out an order with a corresponding cancellation, often at the opening or close of the market, in order to get a particular market reaction.
The SEC at the annual conference of FINRA this spring said the two regulatory bodie are close to finishing “five or six” investigations based on emerging forms of false trading that use high-speed electronic access to markets. The official said “layering” and “spoofing” were at the center of its probes.
In the Hold Brothers case, the SEC said president and co-founder Steve Hold, former chief compliance officer and chief financial officer Robert Vallone, and executive William Tobias were “aware of several e-mails and other indications that manipulative trading was occurring through Hold Brothers accounts, yet they failed to properly investigate the warning signs and recklessly continued to provide overseas traders with buying power and access to the U.S. markets.’’
The SEC net also covered two Hold Brothers customers, Trade Alpha Corporate Ltd. and Demostrate, whose accounts, it said, were used for the manipulative trading. The two are foreign firms that the SEC said “were created and partially owned by Steve Hold.’’
The manipulative trading occurred from January 2009 to September 2010.
The six individuals and entities charged in the SEC’s case agreed to pay a total of $4 million in disgorgement and penalties to settle the charges. They could not be immediately reached for comment.
“Manipulation, whether executed by e-mail, instant message, or multiple phantom orders, is still manipulation,” Robert Khuzami, director of the SEC’s Division of Enforcement, said, in announcing the charges. “Traders and the firms that provide them market access should not labor under the illusion that illegally layering orders amidst voluminous trading data will somehow allow them to evade detection by the SEC.”
FINRA, in its case, said Demostrate and Trade Alpha “used sponsored access relationships with Hold Brothers to connect to U.S. securities exchanges to manipulate the prices of multiple securities.’’
FINRA said it “uncovered hundreds of instances where the foreign day traders used spoofing and layering activities to induce the trading algorithms of unwitting market participants to provide the traders with favorable execution pricing that would not otherwise have been available to them in the absence of the day traders’ illicit spoofing and layering activities.”
Hold Brothers neither admitted nor denied the charges, but consented to the publishing of FINRA’s findings.
