The Securities and Exchange Commission has had a big week of market-structure enforcement. It started with Direct Edge’s $14 million “Hide Not Slide” fine on Monday, and then there was Tuesday’s army of spoofers. Today brought a $14.4 million fine against UBS Securities for doing bad stuff in its dark pool. So that’s a $28.4 million week, even assuming, as I kind of do, that the SEC will recover nothing from the spoofers.
But it feels a little like cheating to count UBS in this week’s tally. UBS’s main violation is that, “Between May 2008 and March 2011, UBS violated Rule 612 of Regulation NMS promulgated under the Exchange Act by accepting and ranking hundreds of millions of orders priced in increments smaller than one cent (‘sub-penny orders’).” Which is bad!
UBS also was selective in its disclosure about those orders (called PPP orders, for “PrimaryPegPlus,” apparently all one word). Basically, it told its favored high-frequency-trader clients how they worked, but was a bit shifty about them with other clients. Notice, though: “Between March 2008 and March 2011.” This ended almost four years ago. Because, “On March 11, 2011, and after a Commission examination team had identified PPP and raised concerns that it might violate Rule 612 of Regulation NMS, UBS decommissioned the PPP order type.”
Huh. How do you think that went? I mean, I have no idea, I wasn’t there, and it was four years ago, but here’s my imaginative reconstruction:
SEC examiner: Hey do you guys realize you’re allowing high-frequency traders to post orders with sub-penny pricing?
UBS: Oh, umm, yeah. Yeah. I suppose we are doing that.
UBS: Hmm. Fair point. This is awkward. Uh … we’re really sorry?
SEC examiner: No, it’s no big deal, we’re not mad or anything. But you should probably cut it out.
UBS: Gotcha, won’t happen again. Thanks for the heads-up.
Right? I mean, the other possibility is that the SEC has been investigating this case for the last four years, ever since it first noticed the problem in that 2011 examination. But once it had caught the clear violation of Rule 612, what was left to investigate? And why would it take four years?
My best guess is, the SEC caught this in 2011, but in 2011 the technicalities of how you operate your dark pool were … sort of viewed as technicalities. If you got it wrong, the SEC told you to fix it, and then you and the SEC had a good laugh about how you messed up. Now, of course, Catching Bad Dark Pool Stuff is a high-profile (Michael Lewis!), competitive (Eric Schneiderman!) and lucrative ($14.4 million!) business. And if the SEC went back over its files to find Bad Dark Pool Stuff that it previously caught, in order to re-catch it for profit and profile, well, you could hardly blame it, could you?
The SEC is really good at looking busy on market structure stuff, is what I’m saying here.
The case itself is kind of weird too. The biggest and most interesting allegation is that UBS allowed favored high-frequency traders in its dark pools to post orders that were a little better than the national best bid and offer, in order to get priority in execution. So if a stock was $50.00 bid, $50.02 offered on Nasdaq, you could post a bid of $50.002 on UBS’s dark pool, and any marketable order coming to that dark pool would trade with you first, giving you priority over any chump sitting there with a $50.00 bid.
That is illegal — you can only post orders in penny increments — but why is it bad? Well mainly it’s unfair to other people playing by the rules and making their bids and offers in penny increments: