Broker-Dealer Charged in Spoofing Scheme

Who may be interested: Investment Advisers, Compliance Staff

Quick Take: The SEC recently settled charges against a registered broker-dealer for manipulating the U.S. Treasury cash securities market through a trading method known as spoofing and for failing to reasonably supervise the head of the firm’s U.S. Treasuries trading desk who made the manipulative trades over a 13-month period.

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Spoofing is the practice of entering and canceling orders, often simultaneously on both sides of a market, to falsely create the appearance of market interest in a security. Spoofing is a form of market manipulation that increases perceived trading volume to create upward pressure on the price of a publicly traded security, especially when the security is thinly traded.

According to the SEC’s Order, between April 2018 and May 2019, the trader entered orders simultaneously on both sides of the market, hiding their size, and once the bona fide orders were filled, the trader canceled the remaining orders and non-bona fide orders. By creating the illusion of supply and demand for the bona fide orders that the trader was looking to execute, the trader obtained better overall executions for the trades. The firm’s compliance system generated an alert concerning some of the trader’s spoofing cycles, but the firm’s compliance department only acted effectively after two external trading firms raised issues concerning the trading patterns. The firm terminated the trader’s employment in June 2019 after concluding that the trader’s activities violated the firm’s compliance policies, which prohibit spoofing.

The SEC’s Order also found that the firm violated an antifraud provision of the federal securities laws and failed to properly monitor and supervise the activities of the trader. The firm agreed to a cease-and-desist order, was censured, and was ordered to pay nearly $7 million in disgorgement, prejudgment interest, and civil penalties. In related matters, the firm entered into a deferred prosecution agreement with the Justice Department and agreed to pay monetary sanctions as part of that agreement and a separate fine to FINRA to resolve related charges, totaling $15 million and $6 million, respectively. Separately, the former trader was indicted in connection with this scheme in November 2023 and is awaiting trial.

The SEC’s order announcing the settled charges can be found here.