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UBS Securities to Pay $14M to SEC Over Dark Pool Violations

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UBS Securities LLC agreed Thursday to pay more than $14.4 million to the Securities and Exchange Commission to settle charges related to disclosure failures and other securities law violations regarding the operation and marketing of its dark pool.

UBS Securities must pay a $12 million penalty — the SEC’s largest against an alternative trading system (ATS)—as well as $2.2 million in disgorgement and $235,686.14 in prejudgment interest.

“The UBS dark pool was not a level playing field for all customers and did not operate as advertised,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement, in a statement. “Our action shows our continued commitment to policing the equity markets to ensure fairness and compliance with all laws and rules.”

Ceresney said on a call with reporters the same day that “this is the first enforcement action to address violations arising from a dark pool’s disclosure of order types to its subscribers.”

On Monday, Ceresney said, “the SEC announced settled charges against DirectEdge Exchanges, that only provided complete information about certain order types to a select group that included [high-frequency trading] firms.”

Thursday’s penalty charges that UBS’s dark pool “violated anti-fraud provisions of the securities laws by pitching a suspect order type almost exclusively to HFT and market-makers,” Ceresney said on the call.

The order type, called PrimaryPegPlus (PPP), enabled certain subscribers to buy and sell securities by placing orders priced in increments of less than one cent. “However, UBS was prohibited under Regulation NMS from accepting orders at those prices. By doing so the firm enabled users of the PPP order type to place sub-penny-priced orders that jumped ahead of other orders submitted at legal, whole-penny prices,” Ceresney said.

Further, the SEC says that its investigation found that UBS “similarly failed to disclose to all subscribers a ‘natural-only crossing restriction’ developed to ensure that select orders would not execute against orders placed by market makers and high-frequency trading firms. This shield was only available to benefit orders placed using UBS algorithms, which are automated trading strategies. UBS did not disclose the existence of this feature to all subscribers until approximately 30 months after it was launched.”

Said Ceresney: “Today’s charges are notable for their breadth. The SEC and others have filed a number of actions against dark pools, but this is the first to charge violations across such a wide spectrum of conduct.”

As the SEC explains, dark pools are essentially private trading systems in which participants can transact their trades without displaying quotations to the public. The largest dark pools are sponsored by securities firms primarily to execute the orders of their customers and proprietary orders of the firms.

SEC Chairwoman Mary Jo White said in a speech last June that the percentage of trading volume executed in “dark venues increased from approximately 25% in 2009 to approximately 35% today.” Former SEC Chairwoman Mary Schapiro tried to ”shed greater light” on dark pools by proposing a regulation in 2009, but it failed to pass.

White said in June that she is “concerned by the lack of [transparency] in these dark venues,” and directed SEC staff to “prepare a recommendation to the Commission to expand the information about ATS operations submitted to us and to make the information available to the public.”

The SEC is set to propose soon stricter dark pool regulations, according to Bloomberg.

UBS ATS, Ceresney continued, “is among the nation’s largest ATS’s, and today’s action identifies a number of significant violations” in addition to the fraud charges.

Those violations include:

  • The Form ATS and amendments that UBS filed with the SEC included inconsistent and incomplete statements about the dark pool’s acceptance of sub-penny orders and the natural-only crossing restriction. The filing also failed to attach certain required documents.
  • UBS violated requirements under Regulation ATS by unreasonably prohibiting subscribers from using the natural-only crossing restriction and failing to establish written standards for granting access to subscribers.
  • UBS failed to preserve certain order data for the dark pool from at least August 2008 to March 2009 and August 2010 to November 2010.
  • UBS violated confidentiality requirements under Regulation ATS by giving full access to subscribers’ confidential trading information to 103 employees who should not have had it (primarily information technology personnel).

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