The Financial Industry Regulatory Authority (FINRA) has censured the introducing broker, SageTrader and has slapped a total monetary penalty of $775,000 for failure in supervising potentially manipulative trading between 2013 and 2019.
SageTrader established itself by customer orders to other broker-dealers for execution . However, the company changed its business model in late 2013 and started offering routing and execution services to domestic and foreign customers. The company even allowed customers to use its market participant identifiers (MPIDs) and route orders to alternative trading systems.
The popularity of the company skyrocketed among day traders that pushed the trading activities on its platform. The number of executed orders jumped from over 67 million annually in 2015 to more than 200 million in 2017. Shares traded by the traders on the platform increased from 3.7 billion to 18.9 billion in that period.
Lack of Supervisory System
FINRA revealed that, until 2015, the trading platform lacked any supervisory system to detect potentially manipulative trading practices like layering, spoofing, wash trades or marking the close.
SageTrader implemented an automated manipulative trading surveillance system in 2015, but the system failed to capture 70 traders of a client for five months.
Additionally, the self-regulatory organization detailed that 70 percent of the internal alerts on SageTrader’s surveillance were triggered by foreign day trader customers of only four firms. SageTrader even classified two of these customers as 'high-risk', but one of them triggered over 197,000 alerts, while the other had 55,000 alerts before it stopped using SageTrader.
Moreover, FINRA highlighted that the company’s review of the surveillance alerts was 'unreasonable'.
SageTrader is headquartered in California with another branch office. The company has eight registered persons, but according to FINRA, it has “limited staff and other resources to sufficiently review and resolve alerts for potentially manipulative trading, which, by 2018, totaled more than 500,000 alerts per year.”
Now, FINRA has ordered SageTrader to review and revise its supervisory system.
