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."
