Wedbush Securities Inc.
The findings stated that the firm stopped providing market access services to its customers. However, the firm still provided certain electronic trading customers with access to third-party electronic trading platforms that routed these customers’ orders to other broker-dealers for execution. The firm mistakenly believed that it was not required to review this trading for any type of potentially manipulative activity since it was no longer providing market access. Instead, the firm believed that the obligation to review this trading for potentially manipulative activities rested solely with the executing broker-dealers. Thus, the firm did not conduct any supervisory reviews of the trading activities by its electronic trading customers for potentially manipulative trading, such as layering, spoofing, wash sales, or marking the close or open. As a result, the firm failed to detect potential layering activity by an institutional electronic trading customer that was comprised of hundreds of foreign day traders.
Upon receiving notice of the potential layering activity from the executing broker-dealer, the firm closed the electronic trading customer’s account. The firm, however, did not take any steps to detect and prevent other electronic trading customers from engaging in potentially manipulative trading, or to implement any type of supervisory reviews for potentially manipulative trading.
As a result, approximately 90 electronic trading customers effected more than 3.4 million transactions involving 13.5 billion shares without being subject by the firm to any review for potentially manipulative trading.
The findings also stated that the firm failed to implement any supervisory system, including WSPs, to review for potential layering and spoofing by the firm’s proprietary traders and all firm customers, including the firm’s electronic trading customers.
The firm’s WSPs failed to include any procedures requiring a review by the firm for potential layering and spoofing activity. The firm later added a reference to layering and spoofing in its WSPs that required the firm’s equity trading managers to conduct weekly reviews of certain supervisory reports to detect potential layering and spoofing.
Those reports, however, were designed to capture other forms of potential manipulative trading, such as wash sales and marking the open and close and were not reasonably designed to detect layering and spoofing.
