SEC Slams HFT Firm with $16 Million Penalty for Net Capital Calculations
A high frequency proprietary trading firm will pay a $16 Million penalty to settle charges that it consistently understated its net capital. The firm’s Chief Operating Officer also agreed to pay $150,000 to settle charges. The SEC alleges that the firm used a commercial program to calculate net capital but used faulty input data that significantly under-calculated appropriate haircuts. Consequently, the firm consistently understated its required net capital. The SEC asserts that the COO was primarily responsible for the inputs but had little experience with net capital calculations and did not seek guidance from someone with expertise. According to the SEC, this is by far the largest penalty ever imposed for net capital violations, exceeding the previous high of $400,000.
OUR TAKE: The SEC has entered the enforcement fray against high frequency traders by using the net capital rule as its weapon of choice. A $16 Million penalty for failing to make the correct net capital calculation appears very punitive especially since the firm did not fail and did not have any customers.