The Financial Industry Regulatory Authority (FINRA) has fined New York-based interdealer broker GFI Securities LLC $50,000 for a series of lapses in Risk Management control around its ATS division.
Wall Street's industry-funded watchdog found that GFI Securities failed to comply with SEC's market access rules that require broker-dealers to document a system of risk management controls and supervision processes to limit financial exposure.
As explained by FINRA, these controls should be built into business processes, supported by real-time alerts and monitoring system.
More specifically, GFI's customers routed equity orders to the firm's traders, who then routed some trades directly to the ARCA or NASDAQ market. Still, the broker used a third-party order management system (OMS) to manage equity trading. In addition, GFI lacked careful documentation to demonstrate risk management and supervisory procedures related to its alternative trading system, CreditMatch.
Finra added that from November 2014 to August 2017, GFI had in place a daily trading capital limit for its equity trading, but failed to document the basis or rationale for that determination. To mitigate these concerns related to market access, the company revised its written procedures, but those revisions included only general requirements and lacked specific risk controls tailored to its own systems.
GFI also fined for disclosing customer identities
During that period, the independent regulator also described other violations, including that GFI failed to prevent the entry of orders that exceeded appropriate pre-set credit thresholds for its non-broker-dealer customers in CreditMatch.
"Finally, the Firm failed to conduct an annual review in 2014 to assure the overall effectiveness of its risk management controls and supervisory procedures with respect to CreditMatch, and failed properly to complete the required certification for 2014 that such risk management controls and supervisory procedures complied with SEA Rule 15c3- 5(b) and (c)," the filing further states.
Overall, regardless of the motivation, Finra considered these violations a disruption to market trading standards, which regulators seek to uphold for all investing participants.
In recent years, US regulators began cracking down harder on alternative trading systems (ATSs), which commonly referred to as "dark pools." These venues have become faster and more automated in recent years, bringing additional risk since no public prices there and trades can be carried out in secret, which can favor high-speed traders.
GFI Securities has recently received several fines, including those related to its equity derivatives desk. The SEC hit the firm last year with a $4.3 million penalty for disclosing customer identities to trading counterparties despite touting that it preserves their anonymity when brokering trades.
