The Financial Industry Regulatory Authority, Nasdaq, the New York Stock Exchange and Cboe Global Markets all censured Credit Suisse Securities and fined the firm $6.5 million for supervisory and Securities Exchange Act of 1934/Market Access Rule violations after repeated failures to prevent market manipulation, FINRA said Monday.
Credit Suisse signed a letter of acceptance, waiver and consent on Nov. 18 in which it agreed to the censure and $6.5 million fine, of which $566,583 is to be paid to FINRA for violating multiple rules. FINRA accepted the letter Nov. 19.
A Credit Suisse spokesman on Monday said only that the firm was “pleased to have resolved these matters with FINRA and these exchanges.”
From July 2010 through July 2014, Credit Suisse offered its clients, including broker-dealers and other institutional entities, some of whom were foreign unregistered entities, direct market access to several exchanges, according to FINRA. The firm executed more than 300 billion shares on behalf of its direct market access clients and generated over $300 million in revenue from its DMA business, FINRA said.
During part of that time, certain of the firm’s direct market access clients engaged in trading activity that generated more than 50,000 alerts at FINRA and the exchanges for potential manipulative trading, including spoofing, layering, wash sales and pre-arranged trading, according to FINRA.
Three of Credit Suisse’s direct market access clients accounted for most of the 50,000 alerts for potentially manipulative activity, FINRA said, noting the same three clients at their peak represented about 20% of the firm’s overall order flow.
FINRA and the exchanges found that during most of the relevant period, Credit Suisse did not establish a supervisory system, including written supervisory procedures, that were reasonably designed to monitor for manipulative trading.
“As a result, orders for billions of shares entered the U.S. markets without being subjected to post-trade supervisory reviews for such potential manipulative activity,” according to FINRA. Credit Suisse was also put on notice of gaps in its surveillance system by correspondence with one of its direct market access clients and by an internal audit report, FINRA pointed out.
Credit Suisse violated numerous provisions of the Market Access Rule that requires broker-dealers who are providing their customers access to an exchange or an alternative trading system to reasonably manage the financial and regulatory risks of providing such access, FINRA said. From 2011 to 2017, Credit Suisse violated the Market Access Rule’s provisions related to the prevention of erroneous orders, the setting of credit limits and the firm’s annual review of the effectiveness of its market access controls and supervisory procedures, according to FINRA.
The Securities and Exchange Commission adopted the Market Access Rule Nov. 3, 2010. It requires brokers or dealers with access to trading securities directly on an exchange, to establish, document and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory and other risks associated with market access, FINRA pointed out.
Among the other specific rules that Credit Suisse violated was FINRA Rule 2010 that requires its members, while conducting business, to observe high standards of commercial honor and just and equitable principles of trade, FINRA noted.
“As gatekeepers to the U.S. markets, it is critical that firms implement a robust supervisory system and actively surveil for manipulative activity in order to protect the integrity of the markets,” FINRA and the Exchanges said in a joint statement Monday. “This case demonstrates that firms who do not reasonably do so will be held accountable.”
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