Another Broker-Dealer Charged with Lying about Trade Routing Practices
A now insolvent broker-dealer was censured by the SEC and agreed to pay disgorgement for misleading clients about how it routed trades. Despite advertising transparent fees and direct market access, the introducing BD routed trades to an affiliate broker-dealer that charged de minimis or no fees. Nevertheless, the BD over-charged the client based on the client’s selected venue. The SEC contends that the respondent re-engineered its software protocols to route the trades to the affiliate notwithstanding client instructions. The SEC charges violations of Sections 17(a)(2) and (3) of the Securities Act for engaging in fraudulent conduct in the offer and sale of securities.
This is essentially another version of undisclosed payment for order flow. In this case, the introducing BD did not actually receive direct payments but was not charged, thereby hiding how it made profits on trading. Back in 2014, this same broker-dealer was charged with aiding and abetting its client’s illegal layering. The SEC needs to take action against payment for order flow arrangements and the trade routing plumbing lest Congress and the public lose faith in the market’s integrity.