Broker-Dealer Fined $1.2 Million for Lucrative Trade Routing Practices
The SEC fined a broker-dealer $1.2 Million and fined and censured its president for misleading clients about how it routed orders.
The firm structured a circular routing system where most trades were routed through two net trading firms that kicked back 70% of the net trading profits before going to external venues. The SEC alleges that the firm intentionally misled clients with how it described the trades through the FIX protocol. The SEC also faults the firm for inadequate disclosure that did not fully describe that it routed most trades through an unnecessary interpositioned broker that shared revenue. The firm ended the arrangement by entering into a direct relationship with a market maker to pay fixed payments for order flow.
Since the Robinhood/GameStop brouhaha, the SEC has been all over trade routing and execution. Ironically, the remedy for this scheme was a “traditional” payment for order flow arrangement. If the SEC attacks PFOF, will these types of circular trading arrangements that hide revenue be unintended consequences?
Read SEC order here.