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June 06, 2014 at 09:59 AM
A day after Securities and Exchange Commission Chairwoman Mary Jo White unveiled a sweeping plan for reining in high-frequency trading and monitoring secretive trading practices, the agency announced Friday charges against New York-based brokerage firm Liquidnet Inc., which operates a dark pool alternative trading system, with improperly using subscribers’ confidential trading information in marketing its services.
As the agency explains, regulations require an alternative trading system (ATS) to establish and enforce safeguards and procedures to protect the confidential trading information of its subscribers. Among them is limiting access to subscribers’ data to employees who operate the ATS or have a direct compliance role.
An SEC investigation found that Liquidnet Inc. violated its regulatory obligations and its own promises to its ATS subscribers during a nearly three-year period when it improperly allowed a business unit outside the dark pool operation to access the confidential trading data.
The SEC says that employees in that unit “used the confidential information about Liquidnet’s dark pool subscribers during marketing presentations and various communications to other customers,” and that Liquidnet “also used subscribers’ confidential trading information in two ATS sales tools that it devised.”
SEC examiners spotted potential data access problems during an examination of Liquidnet and referred the matter to the Enforcement Division for further investigation, the agency says.
Liquidnet has agreed to settle the SEC’s charges and pay a $2 million penalty.
“Dark pool operators violate the law when they fail to protect the confidential trading information that their subscribers entrust to them, as Liquidnet did here when it used this confidential information to try to expand its business,” said Andrew Ceresney, director of the SEC Enforcement Division, in a statement. “We will continue to aggressively police broker-dealers who operate an ATS and fail to rigorously ensure the protection of confidential trading information.”
