NYSE ARCA, INC. Appearances

Transcription

1 NYSE ARCA, INC. FINRA DEPARTMENT OF MARKET REGULATION, v. Complainant, SAL EQUITY TRADING, GP (f/k/a SUSQUEHANNA CAPITAL GROUP) Proceeding No December 16, 2016 Respondent. Respondent violated Exchange Act Rule 15c3-5 and NYSE Arca Equities Rules 6.18 and 6.1 by failing to establish, document, and maintain a system of risk management controls and supervisory systems and procedures, including written supervisory procedures, reasonably designed to manage the financial, regulatory, and other risks of market access. Consent to a censure, a $17,500 fine, and an undertaking. Appearances For the Complainant: Dawn E. Faris, Esq., James J. Nixon, Esq., and Robert A. Marchman, Esq., Department of Market Regulation Legal Section, Financial Industry Regulatory Authority. For the Respondent: Michael D. Wolk, Esq., Sidley Austin LLP. DECISION A Hearing Officer at the Financial Industry Regulatory Authority ( FINRA ) considered an Offer of Settlement and Consent entered into between FINRA s Department of Market Regulation on behalf of NYSE Arca, Inc. 2 and SAL Equity Trading, GP ( Firm ). 1 Includes FINRA Proceeding No FINRA s Office of Hearing Officers reviewed the Offer of Settlement and Consent under the terms of a Regulatory Services Agreement (as amended) among NYSE Group, Inc., New York Stock Exchange LLC, NYSE Arca, Inc., NYSE MKT LLC, and FINRA.

2 The Firm submitted the Offer of Settlement and Consent for the sole purpose of settling this disciplinary proceeding, without adjudication of any issues of law or fact, and without admitting or denying any allegations or findings referred to in the offer of settlement. The Hearing Officer accepts the Offer of Settlement and Consent and issues this Decision in accordance with NYSE Arca Equities Rules. 3 FINDINGS OF FACTS AND VIOLATIONS Background and Jurisdiction 1. The Firm, which was known as Susquehanna Capital Group before November 11, 2016 and during all relevant times of this matter, became registered as an Equities Trading Permit Holder ( ETP Holder ) with NYSE Arca Inc. ( NYSE Arca Equities ) on June 15, At all applicable times, the Firm operated as a proprietary trading firm, and had no customers. 2. The staff of FINRA s Department of Market Regulation, on behalf of NYSE Arca Equities and The NASDAQ Stock Market LLC ( Nasdaq ), reviewed the Firm s compliance with Rule 15c3-5 of the Securities Exchange Act of 1934 ( Exchange Act Rule 15c3-5 ) and related requirements pertaining to supervision and the Firm s adherence to principles of good business practice and just and equitable conduct under the Rules of NYSE Arca Equities and Nasdaq, respectively, with respect to trading on the Firm s ELF2 trading system. The reviews (numbers and ) included, but were not limited to, the Firm s trading in the symbols EMCG (WisdomTree EM Consumer Growth Fund) and XVIX (UBS ETRACS Daily Long-Short VIX), during the period from October 9, 2013, through September 30, 2015 ( Review Period ). These reviews were prompted by the Firm s filing of clearly erroneous ( CE ) events associated with certain proprietary buy orders the Firm submitted in EMCG on October 9, 2013, and XVIX on January 27, 2015, which led multiple exchanges, including NYSE Arca, to cancel certain trades over a two-minute period in each of those symbols. As a result of its reviews, Market Regulation found that the Firm had inadequate risk management controls and supervisory procedures pertaining to market access through its ELF2 trading system as detailed below, contrary to the requirements of Exchange Act Rules 15c3-5(b) and 15c3-5(c)(1)(ii), NYSE Arca Equity Rules 6.18 and 6.1, and Nasdaq Rules 3010 and 2010A during the Review Period By letter dated June 19, 2015, which the Firm received, the Legal Section of FINRA Market Regulation, on behalf of NYSE Arca Equities, notified the Firm that it was 3 The facts, allegations, and conclusions contained in this Decision were taken from the executed Offer of Settlement and Consent. 4 A related disciplinary action on behalf of Nasdaq also is being issued concurrently to the Firm to resolve this matter. 2

3 investigating whether the Firm had complied with Exchange Act Rule 15c3-5 and NYSE Arca Equities Rules 6.18 and 6.1 in connection with the above case. 5 Overview 4. This action concerns the Firm s compliance with the market access requirements of Exchange Act Rule 15c3-5 and related supervision requirements of NYSE Arca Equities Rule 6.18, as well as requirements of NYSE Arca Equities Rule 6.1 to adhere to the principles of good business practice in the conduct of its business affairs during the review period. Applicable Rules 5. Exchange Act Rule 15c3-5 is designed to reduce the risks faced by broker-dealers, as well as the markets and the financial system as a whole, as a result of various market access arrangements, by requiring effective financial and regulatory risk management controls reasonably designed to limit financial exposure and ensure compliance with applicable regulatory requirements to be implemented on a market-wide basis. 6. Exchange Act Rule 15c3-5(b) requires, among other things, a broker or dealer with market access, as defined by that Rule, to establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory, and other risks of its market access activity and to preserve a copy of such supervisory procedures and a written description of its risk management controls as part of its books and records. 7. Exchange Act Rule 15c3-5(c)(1) provides that the risk management controls and supervisory procedures required by Exchange Act Rule 15c3-5(b) must be reasonably designed to systematically limit the financial exposure of the broker or dealer that could arise as a result of market access, including being reasonably designed to prevent the entry of erroneous orders, by rejecting orders that exceed appropriate price or size parameters, on an order-by-order basis or over a short period of time, or that indicate duplicative orders, as set forth in Rule 15c3-5(c)(1)(ii). 8. NYSE Arca Equities Rule 6.1 states, in part: Every ETP Holder shall at all times adhere to the principles of good business practice in the conduct of its business affairs. Further, NYSE Arca Equities Rule 6.18 states, in part, that, Each ETP Holder must establish and maintain a system to supervise the activities of its associated persons and the operations of its business. Such system must be reasonably designed to ensure compliance with applicable federal securities laws and regulations and NYSE Arca 5 Market Regulation staff similarly notified the Firm on behalf of Nasdaq on November 26, 2014, that it was investigating whether it had complied with Exchange Act Rule 15c3-5 and Nasdaq Rules 3010 and 2010A in connection with the above case. 3

4 Equities Rules The ETP Holder s supervisory system must provide, at a minimum [t]he establishment and maintenance of written procedures as required by paragraph (c) of this Rule. 9. The Firm s supervisory system and the controls as required by Exchange Act Rule 15c3-5(c)(1)(ii) were inadequate in that: (a) certain implemented price controls were set too high, (b) the process of setting the Firm s pre-order entry size control thresholds did not consider the security s average daily trade volume, and (c) the Firm s pre-order entry controls to identify and prevent potential duplicative order entry were not based on the particular characteristics of the order. 10. As a result, the Firm violated Exchange Act Rules 15c3-5(b) and 15c3-5(c)(1)(ii), and NYSE Arca Equities Rules 6.18 and 6.1 during the Review Period. ORDER SAL Equity Trading, GP violated Exchange Act Rule 15c3-5 and NYSE Arca Equities Rules 6.18 and 6.1 during the Review Period by failing to establish, document, and maintain a system of risk management controls and supervisory systems and procedures, including written supervisory procedures, reasonably designed to manage the financial, regulatory, and other risks of market access, as described in paragraphs five through ten above. SANCTIONS SAL Equity Trading, GP is censured and fined $17, SAL Equity Trading, GP also is ordered to update its system of risk management controls and supervisory procedures, including but not limited to, its written description of risk management controls and supervisory procedures to address the deficiencies with respect to the areas described in paragraphs five through ten of this Decision. By January 31, 2017, a registered principal of the Firm shall submit to the COMPLIANCE ASSISTANT, LEGAL SECTION, MARKET REGULATION DEPARTMENT, 9509 KEY WEST AVENUE, ROCKVILLE, MD 20850, a signed, dated letter, or an from a workrelated account of the registered principal addressed to MarketRegulationComp@finra.org, with the following information: 1. the updates the Firm has made; 2. any remaining steps it is taking, if any, to its risk management controls as supervisory procedures to address the deficiencies described in this Decision; and 3. the dates the revised controls and procedures were implemented or are anticipated to be implemented. 6 Under the Offer of Settlement and Consent, the Firm agreed to pay a total fine of $35,000, of which $17,500 shall be paid to NYSE Arca Equities. The remaining amount shall be paid to The NASDAQ Stock Market LLC. 4

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